The Australian Treasurer has announced a positive growth rate for the June quarter, indicating that Australia has narrowly avoided another technical recession, but what exactly is a technical recession, and what does the positive growth rate mean for the Australian economy?
1. Growth rate of 0.7% during June Quarter
The most important thing to take away from this piece of data is that it indicates that the economy was performing well in the months of April, May and June. As a result, leading economists such as BIS Oxford Economics’s chief economist, Dr Sarah Hunter have noted that such data is “inherently backward-looking”. In essence, this stat does not capture the impact of the current lockdowns impacting major states and territories such as NSW, Victoria, and the ACT, which will be captured by the growth rate of the September quarter. Dr. Hunter believes it will be around -3%. However, due to the increased rates of vaccination, she believes that the eastern states may be able to open during the December quarter, which may allow for the economy to recover and avoid a ‘double-dip recession’ following the onset of the pandemic.
**2. But what is a technical recession?**
A technical recession in itself means two consecutive periods of negative growth, and are normally accompanied by high rates of unemployment, high rates of government spending and low rates of consumer confidence. This is the type of recession most commonly referred to by your textbooks as well as the media, however, bodies such as the RBA note that there are indeed limitations about this definition. This is mainly in regard to how it fails to capture the level of volatile components of GDP, not accounting for periods with slow growth where high levels of unemployment and low levels of consumer confidence are prevalent, and how it can be subject to revisions following the release of new data. It is also worth noting that prior to 2020, Australia had not faced a technical recession for 29 years, despite encountering isolated quarters of negative growth (such as the negative quarter during the Global Financial Crisis).
3. So what does this mean for the Australian economy?
As recession is a term used to refer to an economic downturn, it mainly impacts the economy through how it influences consumption and investment decisions, usually lowering consumer confidence, prompting lower aggregate demand, and subsequently lower growth levels. However, it is normally the aforementioned declines in growth, confidence and increases to government spending associated with a recession that concern economists the most.
While Australia is not in a technical recession at the moment, the lockdowns have had a substantial impact on business income, consumer confidence, government spending and unemployment as well as underemployment. Figures such as CBA economist Gareth Aird reinforce this point highlighting that “for all intents and purposes the Australian economy is currently in a manufactured recession as we go through another huge negative shock”. It should also be noted that the lack of consumer and business confidence fostered during the lockdown periods may have carry on impacts during the December quarter, reflected through Deloitte Access Economics senior economist Harry Murphy Cruise notion of a “very real chance” that Australia will experience a recession this year.