Unlike previous recessions, Australia did not enter this one with a strong economy

Greg Jericho
·4-min read
<span>Photograph: William West/AFP/Getty</span>
Photograph: William West/AFP/Getty

One of the biggest problems for Australia is that unlike previous recessions we did not enter this one with a strong economy. The stores of economic success were already depleted after six years of flat household income growth and thus we have had a bust without any boom.

Right now economic data is rather confusing as we try to discern what is real and what is artificial.

Take the latest inflation growth figures. The big headline was that in the June quarter the CPI fell 1.9% – the biggest quarter of deflation since the Great Depression.

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That certainly is enough to make you have a slight panic attack. Deflation is not a good state of affairs – it means you are better off not spending your money now. That tends to lead to economic depression.

And yet a very large contributor to that deflation was the artificial drop in prices for childcare, which during the June quarter were subsidised by the government. As a result childcare prices fell 95%:

That is clearly not a “real” impact but one forced on the economy (for good reasons) by government policy.

But let us not be fooled into thinking were it not for that policy things would be tripping along merrily.

If we exclude childcare, which is included in the group of furnishings, household equipment and services, annual CPI growth goes from a fall of 0.3% to a rise of 0.5%. That seems better, but is still the lowest this century, while the Reserve Bank’s underlying inflation measure of the “trimmed mean” grew just 1.2% - the lowest ever recorded:

But the underlying inflation growth also reveals the reality that even before the pandemic crisis things were amiss with Australia’s economy.

The RBA targets underlying inflation growth of between 2% and 3% and yet for the past four and half years growth has been below 2%.

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That is not suggestive of an economy running hot.

When we look at the latest final demand growth figures that came out last Friday we see much the same:

While demand has fallen in the year to June, even in the 12 months to March demand in the economy grew just 1.4% and had been dribbling along at that level for the past five to six years.

This is actually quite odd, and displays just how weird is this current recession.

Normally a recession is preceded by a boom. In the years before targeting inflation in the early 1990s, Australia’s economy was very much a boom-bust one.

One of the key reasons the RBA began targeting inflation in the early 1990s was the hope that such a policy would put an end to surging asset prices followed by sharp downturns.

It led to the “great moderation” – where the economy was neither too hot nor too cold. At least until the global financial crisis destroyed the notion that recessions had been defeated.

Before the 1980s and 90s recession and the GFC Australia’s economy grew at an average clip of more than 3.5% for two years. The late 1980s were so hot that even GDP per capita was booming at 3% growth before the bottom fell out:

But in the two years before Covid hit, the economy grew a mere 2.3% on average – slower than even the long-term average, let alone what occurs during a boom.

GDP per capita growth was so weak that during 2018-19 we could not even manage more than 1% average growth.

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The building sector is also a good example of how things have changed.

Before the 1990s recession, private-sector residential building approvals grew by up to 60% – clearly unsustainable. But even before the GFC, building approvals grew by a solid 15%:

By contrast, in 2018-19 building approval numbers were already falling.

The difference is even more stark when we look at the growth of our living standards.

Before both the 1990s recession and the GFC, real household disposable income per capita grew well above the 40-year annual average of 1.3%.

But the past two years (actually the past six years) household incomes have barely grown at all in real terms.

It means we are suffering a catastrophic economic downturn without even the usual bank of solid growth to draw on.

We entered the recession in a weak state, and if all we do is return to that previous position the times of boom and bust will have been replaced not by a period of great moderation, but great despair.