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With the talk of a recession in full swing, we should get a few things out of the way.
Firstly, no recession is inevitable, so let’s put an end to such talk right now. You want a recession, then start reporting and saying that we will probably have a recession.
Secondly, even if we do have a recession, the size of that economic horror is very much able to be managed. Finally, we need to forget about GDP as a measurement of recessions – that will come too late to help us.
When things go bad in an economy they go bad fast. The stock market is a great example. At the start of 2017 the ASX200 index was around 5,700 points. For the next two years it burbled along, rising a bit, falling a bit and then last year it rose consistently.
On 20 February it hit a record high of 7,162 points. And then within just 12 trading days it had fallen all the way back to where we were at the start of 2017:
But while an economic downturn can take us by surprise, what is different about any economic downturn we might be about to experience is that it does not, as is usually the case, come off the back of a period of economic strength.
Always remember that even before the bushfires and the impact of the coronavirus things were pretty grim.
At the start of December the market was pricing in another rate cut to the current level of 0.5%. It wasn’t doing this because it was seeing good times ahead; it was because the domestic economy was staggering and there was no prospect of the government providing any fiscal stimulus:
Now the stimulus is coming and yet the market is pricing in another rate cut to 0.25%, at which point it is unlikely the Reserve Bank will go any lower as it will instead embark on more unorthodox measures.
The standard way in Australia we measure recessions is GDP growth – two consecutive quarters of negative growth (seasonally adjusted) equals a recession.
It is a dumb measure and we really need to ditch it – especially if you feel the need to call it a “technical” recession. There is nothing technical about a recession, and if you think calling it that makes you sound more intelligent, please stop.
Also let’s say the March and June quarters are both negative. We will only discover that in September, at which time it will be far too late to matter.
So what should we look for?
Firstly, unemployment. As I noted last month, the US economist Claudia Sahm has come up with a measure that looks at whether unemployment rises in less than 12 months by more than 0.5% pts.
You could quibble about the 0.5% pt line being too low, but the reality is it does not happen often, and when it does it invariably keeps rising.
Certainly this happened during 2008’s global financial crisis:
But within the labour market what we find is youth unemployment is the canary in the coalmine. Young, inexperienced workers are always the first to be cut, so when youth unemployment starts rising, start worrying.
The next labour force figures come out on 19 March.
When you hear “coronavirus” you think travel bans. This is going to be the most immediate hit to our economy – a drop in arrivals not just from China but from all nations as tourists avoid planes and stay home.
For comparison we can look at what happened after the September 11 attacks and the Sars outbreak. In those cases annual short-term arrivals fell up to 14%:
The next travel data comes out on 16 March, but we won’t see the February figures until 15 April.
The coronavirus, as during all recessions, is going to hit our exports. Again this happened in the GFC – both good and services exports fell in early 2009, not long after unemployment began rising:
Given that the centre of the coronavirus is China we should expect these figures to begin falling earlier than they did in the GFC.
The next monthly trade data, containing the February figures, is out on 7 April.
When the economy turns sour, among the first to react are people looking at buying a home. You don’t think about doing that when you are worried there is a chance your hours can be cut or you could lose your job.
When the GFC hit, housing finance began falling before unemployment really started rising. That was because the GFC was a pointedly financial issue, but we can still look to housing finance figures to see signs of concern:
Retail trade is also a strong indicator of sentiment. During the GFC we absolutely stopped shopping – and that was a major reason for the cash payment stimulus. But one area we can look at first is the spending on eating out at restaurants. During the GFC we stopped eating out before we reduced other spending:
One oddity is that now, while retail trade is collapsing, we are continuing to eat out:
There are also surveys of businesses that we can monitor. For example the NAB business conditions survey turned negative in June 2008, while actual GDP growth only fell later in the December quarter of that year:
The latest business conditions release came out on Tuesday, showing a two-point fall, with overall business conditions mow marked as “neutral” – not a great point to start from.
When the economy turns bad, data can quickly become out of date. This is very much the case with GDP and other “quarterly” measures but we have numerous monthly data to rely on that will point the way, and let us know how badly the economy is performing and – importantly – how well the stimulus measures are working.