Tuesday, March 10, 2009

Are we in a recession? Probably!

The definition of a recession is arbitrary. The common definition of two consecutive quarters of negative growth in real GDP is but a ‘rule of thumb’. Interestingly, as recent as 2001 the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) declared a recession despite not observing two consecutive quarters of negative growth (www.nber.org/cycles/recessions_faq.html).

So an interesting question is, from where did this definition originate?

It appears that the definition dates back to 1974. Julius Shiskin1, in an article published in the New York Times suggested there are three characteristics of a recession, duration, depth and diffusion. Two quarters of consecutive negative growth is but one of two criteria relating to duration. Arguably, many of the features suggested by Shiskin are not relevant to the modern era. (It is important to note that at the time of this article the world economy looked remarkably different from what it does today.)

Therefore, how do we know whether we are in a recession?

More recently, Lakshman Achuthan and Aniran Banerji of the Economic Cycle Research Institute argued that GDP should not be the sole means of identification. They argue that a recession is characterised by a pronounced, pervasive and persistent downturn in a broad set of measures. These measures include jobs, income and spending.

Is Australia in a recession?

It is undeniable that recent economic data show a pronounced and pervasive downturn in the broad measures of the economy. Arguably this downturn has been persistent also, given the first signs of a downturn began in September of last year. Therefore, I suggest, we are in a recession.

However, I strongly believe, a debate about whether we are in a recession is futile. The fact is that the economy is in trouble (GDP down 0.5% according to figures released last week). Also, the future looks bleak given the plight of our economic partners. Therefore, it is absolutely necessary that government policy (proposed or otherwise) be critically assessed.

It is my opinion that the policies and ideas suggested by the federal Government are less than inspiring. Furthermore, I believe the Opposition has not been as effective as they need to be in presenting a sound alternative. The end result being, we are likely to experience a downturn more pronounced, pervasive and persistent than should otherwise be.


  1. so, are we in a recession?

  2. easy yes or no qrestion

  3. I believe we are currently experiencing a mild recession. I also expect that this will be the case for the remainder of the year.

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