Finance

The RBA thinks Australia is in recession: Kohler

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Memo Kevin Rudd: It’s about time we had a Business Cycle Dating Committee. It might tell the truth about when the Australian economy is in recession.

Memo Kevin Rudd: It’s about time we had a Business Cycle Dating Committee. It might tell the truth about when the Australian economy is in recession.

You’d have to say the Reserve Bank thinks Australia is in recession; the last time rates were cut 3% in three months, a recession was well underway.

The Business Cycle Dating Committee is not a corporate bike-riders singles club. It’s a division of the United States National Bureau of Economic Research that has the infrequent task of dating the peaks and troughs of the business cycle, and specifically the start of recessions.

Last night the committee declared that the US cycle peaked in December 2007 and that a recession began in that month. The expansion began in November 2001 and lasted 73 months – 47 months less than the previous expansion in the 1990s. The recession is now 11 months old.

December 2007 is as early as any of the pessimists had thought the recession had begun. It goes completely against the official GDP data that show the US is still not in recession and appears to have been a shocking revelation for the sharemarket – the S&P500 was absolutely smashed last night, closing 9% lower.

Meanwhile the Australian Reserve Bank has now cut rates by another 1%, which means the official cash rate target has been reduced 3% in three months.

By exceeding most economists’ expectation for a 75 basis point cut, the RBA is clearly signalling that it thinks the economy is in worse shape than previously thought.

But would an Australian Business Cycle Dating Committee, looking back from 2009, say we were in recession in December 2008? It probably would, even though under the statistical definitions the economy is still expanding.

The usual definition is two consecutive quarters of “negative growth”. Wednesday’s national accounts will show that the expansion continues – at a much slower pace of 0.2% for the quarter and below 2% a year; but still an expansion.

The US Business Cycle Dating Committee’s definition is less specific: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”

The committee has determined that the whole of 2008 meets that fuzzy definition in the US.

In Australia that sort of definition may or may not apply now, or even a few months ago, but the good thing is that having an independent dating committee removes the issue from politics – but not entirely of course.

The best thing about the sort of fuzzy definition used by the US is that it’s more likely to accord with people’s experience, rather than the political/statistical definition.

In Australia, as with everywhere else in the world, the problem for monetary policy is that banks are not lending – although they are prepared to lend more here than in Europe and the US.

And the price of something – credit – doesn’t matter much if it’s not for sale.

This article first appeared on Business Spectator

 

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