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Normal text size Larger text size Very large text size The government has unleashed $17.6 billion of federal spending in a bid to save Australia from recession. Some economists say we might already be in the middle of our first recession since the early 1990s. Recession would mark the end of Australia's world-beating, 28-year economic expansion – a feat achieved by no other developed nation in modern history. It would also be the first recession that anyone aged under about 50 has encountered during their working lives. But what is a recession? And why should we care? What is a recession? Unfortunately, just as there is no one definition of what a "pandemic" is, nor is there just one definition of "recession". Eventually, it just sort of becomes clear when you're in one. The yardstick you'll most commonly hear the media and some economists refer to in coming months is that of a "technical recession". This describes a situation where growth in economic output, as measured by "gross domestic product", goes "negative" for two quarters in a row.


What's GDP and what does it mean if it turns negative? Basically, "gross domestic product" or GDP is a measure of the value of all goods and services produced by a nation during a period of time. Since 1959, Australia's GDP figures, or "national accounts", have been measured on a quarterly basis, that is, over a three-month period. The latest accounts show that during the final three months of last year (the December quarter), Australians produced goods and services valued at $480.4 billion. That was up $2.5 billion on the value of goods and services we produced in the three months prior to that. So, we say that GDP grew by 0.5 per cent in the December quarter. The economy was clearly expanding. Since then, however, we've had severe disruptions to economic activity, including bushfires and the response to the outbreak of the coronavirus. It is highly likely that the value of goods and services Australians were able to produce in the first three months of this year (the March quarter) was less than the previous quarter. That is, it's likely the economy contracted – growth was "negative". But one swallow does not make a summer. And one quarter of reduced output does not necessarily indicate an economy heading into full-blown "recession". The media waits to see two quarters of contraction before calling a "technical recession".


And even then, it may not be so simple, as there are many different yardsticks for recession. Economist Saul Eslake: unemployment is a better measure of recession. Credit:Peter Mathew What other definitions of recessions are there? Economist Saul Eslake has a long memory and wonderful spreadsheet skills. He has produced research that suggests a better definition of recession is a period in which the jobless rate rises by 1.5 percentage points or more within an 18-month period. This, according to Eslake, is a better fit for what most Aussies would feel is a recession. On this measure, Australia was in recession in the period following the global financial crisis, because our jobless rate rose from 4.0 per cent in August 2008 to 5.9 per cent by June 2009, although we did not hit the "technical" definition of two consecutive quarters of negative growth. In the US an independent, not-for-profit organisation called the National Bureau of Economic Research (NBER) is responsible for calling recessions (we have no equivalent). It doesn't use the two quarters of negative GDP growth definition, either. Instead, it looks at a broader range of indicators, including income and jobs data. A group of people called the Business Cycle Dating Committee meets to assess the evidence. "We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough," the NBER website explains. "The time in between is a recession, a period when economic activity is contracting. The following period is an expansion."


Paul Keating as treasurer in 1990. Credit:Peter Morris Recessions past, including the one we "had to have" 1990-91: The recession that Australia "had to have," according to then treasurer Paul Keating

1982-83: This recession coincided with drought, making it particularly deep

1974-75: Wages and inflation spiralled while house prices crashed

1971-72: The early 1970s was marked by a period of "stagflation", a pernicious mix of high inflation and weak growth

1960-61: This recession sparked a period of deflation, or rapidly falling prices. Should you care if the economy is contracting? The answer is: it depends. If the economy suffers only a short, sharp shock to output – such as a highly contagious but relatively mild-to-most-people virus that passes through a community in a short period – the situation may be less serious. What really matters is if the economy losses so much momentum that firms start to anticipate a sustained period of revenue shrinkage. In such a world, companies may decide to lay off their workers in a bid to avoid going insolvent, or they may just go under, regardless. If lots of companies are downsizing at the same time, sacked workers may find it hard to pick up another job. If they can't get a job, they can't pay their mortgages. If they can't pay their mortgages, the bank might sell their homes. If that happens to enough people, home values may fall. That could lead even more people to spend even less, forcing even more job losses. And so forth.


That's the type of contraction that everybody cares about a lot. Treasurer Josh Frydenberg and Prime Minster Scott Morrison announce their stimulus package. Credit:AAP Will the government's stimulus package work to avoid recession? The whole point of this week's stimulus package is to short-circuit such an outcome by keeping businesses afloat, both through tax concessions and increased purchasing by households, thanks to the one-off $750 payment to 6.5 million pensioners and other income-support recipients. Eslake says the package will help, but it's too soon to tell if it will work to stave off recession, "technical" or otherwise. "It's possible, but that will depend on something that noone knows the answer to, which is: how long will this pandemic – and the measures governments have to impelement to contain it – last?" One thing we know is that the money will do little to stop the March quarter GDP growth figures being negative – because those three months are almost over. However, if all of the $11 billion in spending set to be delivered by the end of June is spent, it could add a significant amount to June quarter GDP and stave off the dreaded "technical" recession.


Interest rate cuts are also helping to put cash in people's pockets and the Aussie dollar has fallen, providing help to exporters. And the government has promised more stimulus, if the impact of the virus should deepen. Some economists, however, say a technical recession is already upon us. "For us, despite the government’s bold efforts, the June quarter is still likely to show negative growth and Australia will experience a technical recession," says Westpac chief economist Bill Evans. We won't see the June quarter GDP figures until the first week of September. So it's likely to be another long and nervous wait.