Diagnosis: It's Not Good
Sydney Morning Herald
Wednesday November 5, 2008
It's the word on everyone's lips - recession. We know it's bad and we don't want it arriving on our shores.
But what exactly is it?Recession is the low point in the economic cycle, its severity a reflection of the excesses of the boom that preceded it. That's why there's so much fear afoot because greed reached new heights in the latest boom.In a typical cycle, boom is followed by rising interest rates to rein in runaway share and property prices and the inflation that ensues when consumers feel wealthy and confident. The result is a fall in asset prices and a slowdown in economic activity as more expensive money increases business costs and discourages investment.While economic cycles are inevitable, each one is different - hence the uncertainty about how the current crisis will unfold.Not all economic cycles end in recession. Sometimes a downturn is enough to restore equilibrium before the next upturn in economic activity. Over the past 30 years, Australia has experienced five turns of the wheel, ending in recession in 1982-83 and 1991 but a milder slowdown in 1986, 1996 and 2001.In rare cases, recession is so severe and long lasting that it descends into depression. No one rings a bell to say when the line is crossed, it's simply a matter of degree.This time around, the seeds of recession were sown in the US with the housing crisis and subsequent credit squeeze which spread to Europe and Asia. The deflation of the property and equity asset bubbles is still in progress, while reduced credit and falling consumer confidence are depressing economic growth.Economic boffins define recession as two consecutive quarters of negative growth, using the nation's gross domestic product as their measure. GDP grew at about 0.5 per cent over the March and June quarters and the September figure is likely to be similar amount.AMP chief economist Shane Oliver thinks the Federal Government's $10.4 billion cash handout will prop up growth in the December quarter but says there's a high probability of negative growth in the March and June quarters next year. In other words, recession is likely.While economists debate statistics, the most dreaded aspect of recession for the average Australian is the threat of losing their job and their home, as businesses lay off workers who then struggle to pay the mortgages.Unemployment hit 11 per cent in the recession of 1991 and 10 per cent in 1982-83, while interest rates rose to 18 per cent and 21 per cent respectively.This time, the cash rate has peaked at 7 per cent and Oliver believes the jobless rate, currently 4 per cent, is likely to top 6 per cent next year. The gloomiest predictions are for unemployment of up to 10 per cent.Co-ordinated global action to cut interest rates, guarantee bank deposits and inject cash into the financial system is starting to restore confidence but the horse has already bolted. Oliver says the US, Britain and Japan are probably already in recession. Time will tell if Australia follows.
© 2008 Sydney Morning Herald