Are we in a recession? Technical recessions, ‘per capita’ recessions and other statistical dips

This week’s release of GDP data by the ABS has generated an unusually large amount of noisy and impatient commentary about the definition of a ‘recession’ and whether or not Australia is in one. This is despite the fact that Australia has enjoyed a record period of 27 years of growth, with no national recession (technical or otherwise) since 1991.

In the interests of clarifying these data without adding to the noise, we present some useful definitions and a quick update on the latest Australian headline data.

What is a recession?

There is no fixed statistical definition of ‘recession’ but the most common rule of thumb is that it entails two or more consecutive quarters of negative growth in real output volumes, or real GDP.

Many qualifications can be added to this basic definition, such as “two quarters of shrinkage that are not caused by a natural disaster”, or “two quarters of shrinkage that are accompanied by rising unemployment”. The basic point is that it involves at least two quarters of real shrinkage due to changes in the economic cycle and not just a short glitch or a weather-related disruption.

Output recessions in Australia

Australia has not suffered more that two quarters of negative growth in real GDP since 1991. Single quarters of negative growth in real GDP were recorded in 2000 (due to the introduction of the GST), 2008 (the GFC) and 2011 (Queensland floods). 2016 saw one quarter of zero growth. Q3 and Q4 of 2018 have been unusually and disappointingly weak but they were not negative (chart 1).

Chart 1: Australian real GDP, annual and quarterly growth

Income recessions in Australia

The question of ‘recession’ can also arise in relation to ‘real incomes’ instead of ‘real output’ growth. In Australia, real aggregate national income is inherently more volatile than real output growth due to the large proportion of national income that is generated from commodity exports. Earnings from commodity exports are highly variable from quarter to quarter, due to the vagaries of the weather (which affects the volume and timing of agricultural and mining output and exports) and the pricing of global markets (as embodied in our ‘terms of trade’, which is the ratio of all our export prices to all our import prices).

Although there has not been two consecutive quarters of shrinking real output volumes since 1991, there have been several periods in which ‘real net national disposable income’ has shrunk over two or more quarters (chart 2). These periods are sometimes referred to as ‘national income recessions’. They generally arise from weather-related disruptions to export volumes and/or global commodity price disruptions to the terms of trade. They indicate a drop in national aggregate income in Australian dollar terms in the relevant quarter. But, since they are commodity-related, their effects have generally been felt only in the industries that earn their income from the relevant commodities. That is, businesses in our mining and agricultural sectors.

Chart 2: Australian real net national disposable income, annual and quarterly growth

‘Per capita’ recessions in Australia

The debate about recessions gets more interesting when we examine rates of growth in output and/or incomes on a per capita basis. That is, the amounts produced or earned per person. National output per capita is simply calculated by dividing total output from all sources by the estimated resident population. Similarly, national income per capita is calculated by dividing total income from all sources by the estimated resident population. In the case of national income per capita, this is not equivalent to a measure of ‘wage income per person’ or ‘income per household’, since it includes income from all sources and not just the wages and other income accruing to households.

Mathematically, these measures will move negative in a given quarter whenever the growth rates in output or income are slower than the growth rate in our population. With population growth tracking at around 1.7% p.a. over the past decade (and 1.1% p.a. prior to 2008), periods of ‘per capita’ recession have become relatively more common, on either an output or income basis. Currently, a drop will occur in any given quarter when output or income growth in the quarter falls below 0.4% q/q, which is approximately the current population growth rate per quarter (chart 3).

On a national aggregate basis, drops in income per capita have been relatively more frequent than drops in per capita output since at least 2008. This is because income per capita is more easily disrupted by price effects (terms of trade) and export earning effects (trade volumes) than is real output, from quarter to quarter. And as more of our national income is derived from commodities, the more readily our national income per capita can be disrupted by price and volume volatility.

The latest ABS data indicates that in 2018, Australia experienced two quarters of negative real income growth per capita (Q2 and Q3) and two quarters of negative real output growth per capita (Q3 and Q4). This means that aggregate incomes and output grew at a slower rate than the population during these quarters (i.e. below 0.4% q/q). If these trends were sustained and if the income being affected were broad-based, this would be of major concern for national growth trends.

Chart 3: Australian real GDP and real net national disposable income per capita, quarterly growth

Statistical significance of the mining boom

The influence of the terms of trade on Australian real net national disposable income per capita has become markedly stronger since the commodity boom commenced in around 2008 (chart 4). The growing strength of this link between national income and the terms of trade reflects the growth in Australian national income derived from commodity exports.

These fluctuations in commodity income are large but they do not generally affect the day to day incomes of most Australians. This is because the income concerned is additional to the ‘base level’ income being earned by people and businesses in other industries. It accrues to mining businesses and workers and through them, to investors including superannuation and pension funds. This is most clearly demonstrated with a quick look at the profits earned in each quarter across the relevant industries (chart 5). Mining profits have soared to the point where they now account for around 38% of all gross operating profits (GOP), up from around 23% one decade earlier. This is where the income volatility is felt in practice. For people and businesses in other industries, output and income growth has been decidedly slower but also flatter and less volatile.

Chart 4: Australian real net national disposable income per capita, and terms of trade

Chart 5: Australian company gross operating profits (GOP), selected industries, to Q4 2018


So, are we in a recession or not?

Australia has not met the traditional or ‘technical’ definition of recession – two consecutive quarters of negative real output growth – since 1991.

On a per capita basis however, Australia experienced very short ‘per capita recession’ on an output basis and on an income basis during 2018. Our ‘per capita income recession’ in 2018 was largely caused by the volatility in commodity (and to a lesser degree, agricultural) export earnings and was not overly unusual. In some respects, the export income being earned (or not) from mining in each quarter could be regarded as an additional (rather large) cherry on an otherwise relatively flat cake.

Our ‘output per capita recession’ in 2018 was related to disruptions to agricultural production in the second half of 2018, but also reflected slower house construction and weaker production from a handful of other industries since mid-2018. This ‘output per capita recession’ is more unusual than the ‘income per capita recession’ and is therefore of greater concern.

However, if it can be explained by relatively strong population growth (estimated at 1.6% p.a. or 0.4% q/q in 2018) temporarily overtaking our real output growth (only 0.3% q/q in Q3 and 0.2% q/q in Q4), then it may prove to be nothing more than a timing glitch, as our economy takes a breather after an extended house building boom.

Other indicators of a more serious ‘recession’ event – such as rising unemployment and insolvencies or declining labour participation – are conspicuously absent from this event in 2018. In this regard, our glass still seems to be closer to half full than to half empty.

Australia’s mining boom has well and truly demonstrated that national incomes growth can be propped up in the short term by price effects. But in the longer term, it is output – and especially output per capita – that really makes a difference to national incomes and national living standards. This is why productivity growth remains so very important to national economic and incomes policy.

Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” Paul Krugman (1990), The Age of Diminished Expectations.

The following two tabs change content below.
Julie heads the Australian Industry Group’s economics team, producing economics research, comment and policy advice for Ai Group and its members. She is also: Adjunct Professor of Economics and advisory board member at Deakin University; panel member of the Melbourne Economic Forum at the University of Melbourne; and a member of the National Economic Policy Panel of the Economics Society of Australia.

1 Comment

  1. Harley Dale

    Thank you, Julie. Finally some common sense on the issue! People who are lazily throwing around the ‘R’ word are ignorant to the fact that we are in the highest risk time of the last 30 years of perpetuating the very outcome we want to avoid.


Leave a Comment

Your email address will not be published.