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What’s a recession – and how can we tell if we’re in one?

<div class="theconversation-article-body"><a href="https://theconversation.com/profiles/leonora-risse-405312">Leonora Risse</a>, <a href="https://theconversation.com/institutions/university-of-canberra-865">University of Canberra</a> Today’s <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">economic data</a> shows that, outside of the pandemic, the Australian economy has slowed down to its lowest annual rate of growth since the early-1990s recession. That’s prompting the dreaded question: are we headed for another one? Any mention of the “R” word can trigger anxiety. Recessions bring job losses and financial strain, and put serious pressure on people’s mental health. These impacts can be especially severe for people who are already experiencing disadvantage and vulnerabilities. But what exactly does it mean to be in a recession? What are the different ways we define them? And are these current approaches the best way to measure people’s economic pain? <h2>What’s a recession?</h2> A bit like the waves of the ocean, our economy is characterised by ebbs and flows in overall activity. Spending and business growth can swell during times of confidence, but slow down when optimism deflates or the economy is hit by an unexpected shock such as a pandemic or climate disaster. This pattern is what economists describe as “the business cycle”. Most of the time, our economy is constantly growing, even if the pace varies. Conventionally, we measure this pace by tracking changes in the level of <a href="https://www.rba.gov.au/education/resources/explainers/economic-growth.html">gross domestic product</a> (GDP) – the overall volume of items and services being produced, bought and sold in the economy. The <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/jun-2024">latest economic growth rates</a> of 0.2% for the June quarter, and 1% over the past year, tell us that the Australian economy is still growing, even if at a slower pace than previous years. Occasionally, the economy slows down to such a grind that economic activity, from one quarter to the next, shrinks. When this happens, the GDP measurements come out negative. When we have two negative measurements of GDP in a row, this is defined as a <a href="https://www.rba.gov.au/education/resources/explainers/recession.html">technical recession</a>. This is what happened to most countries around the globe during the COVID-19 pandemic. Prior to the pandemic, Australia hadn’t experienced a technical recession since 1991. The latest figures tell us Australia is staying afloat for now. But that doesn’t mean it doesn’t feel like a recession to many people. Some other metrics show why. <h2>Other measures of recession</h2> Growth in economic activity is fuelled, in part, by a growing population. Dividing total economic output by the population size, GDP per capita can offer a more accurate picture of people’s economic reality. This population-adjusted measure of economic growth has long fallen into negative territory. Today’s figures tell us that Australia’s GDP per person has been shrinking for 18 months. Our annual per capita growth rate is now -1.5%. <figure class="align-right zoomable"></figure> In the United States, recessions are measured differently again. Recessions are officially declared by the National Bureau of Economic Research (<a href="https://www.nber.org/research/business-cycle-dating">NBER</a>). Unlike technical recessions, these aren’t based on a simple rule. NBER considers a range of measures beyond GDP – including personal income, employment, personal consumption, wholesale and retail sales, and industrial production across multiple sectors – when deciding whether to declare a US recession. <h2>Is Australia heading for a recession?</h2> This is a challenging question to answer because the GDP figures economists conventionally use to diagnose the situation only come to light after a recession hits. Today’s economic figures from the ABS are for the June 2024 quarter – now more than two months old. Measurements of the current economic climate won’t come through in official statistics for some time. If it occurs, by the time a recession is officially diagnosed, we’re usually well and truly in it. A similar limitation applies to the retrospective approach of the <a href="https://www.nber.org/research/business-cycle-dating">NBER</a>, which “waits until it is confident that a recession has occurred”. It’s like a weather forecaster declaring a cyclone has hit only after the wind gusts have blown your roof away. But we can use other metrics to alert ourselves to recession risks before the eye of the storm hits. <h2>Using jobs numbers as a recession alert</h2> One approach is the <a href="https://fred.stlouisfed.org/series/SAHMCURRENT">Sahm Rule</a>, named after its creator, US economist Claudia Sahm. By analysing patterns in the monthly unemployment data that preceded past recessions, Sahm devised a <a href="https://stayathomemacro.substack.com/p/the-sahm-rule-step-by-step">formula</a> to detect when increases in the current unemployment rate were rapid enough to pose a recession risk. The advantage of this approach is that unemployment statistics come out more quickly and frequently than GDP numbers. Many would also argue that monitoring unemployment, rather than GDP, is a more meaningful metric to reflect people’s everyday experiences of the economy and wellbeing. The Sahm approach tracks how quickly the national unemployment rate is currently rising compared to the past year. It’s calculated by comparing the current three-month moving average of the national unemployment rate to this figure’s lowest value in the previous 12 months. This “moving average” approach smooths out the bumpiness of monthly figures. A jump of 0.5% or more signals the economy’s current pattern is on the cusp of recession. While the Sahm formula was developed for the US economy, it does a fairly good job of waving a red flag where recessions previously occurred in the Australian economy, too. Australia’s latest unemployment rate – inching up to 4.2% in July 2024 – pushed the Sahm value up to 0.5%. <iframe id="3d239" class="tc-infographic-datawrapper" style="border: 0;" src="https://datawrapper.dwcdn.net/3d239/5/" width="100%" height="400px" frameborder="0" scrolling="no"></iframe> This indicator doesn’t necessarily mean that a recession will occur. But it suggests policymakers should be on high alert. The Sahm indicator also validates the experiences of job seekers who – despite official definitions that the economy is not in recession – are personally feeling the pressures of a slowing economy and shrinking job opportunities. As our approaches to measuring and managing the ups and downs of the economy continue to evolve, these people-centred metrics are an increasingly important part of our toolkit.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important;" src="https://counter.theconversation.com/content/238199/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/leonora-risse-405312">Leonora Risse</a>, Associate Professor in Economics, <a href="https://theconversation.com/institutions/university-of-canberra-865">University of Canberra</a> Image credits: Shutterstock This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/whats-a-recession-and-how-can-we-tell-if-were-in-one-238199">original article</a>. </div>

Money & Banking

New Treasurer claims ScoMo left economy in "a mess"

New Labor Treasurer Jim Chalmers has claimed Scott Morrison left Australia's economy in "a mess", and warned Aussies of a "serious economic challenges" ahead. At a press conference on Wednesday, Chalmers told the media that inflation and interest rates were higher since the end of March, petrol prices were up 12 per cent since the end of April, and wholesale electricity and gas prices were also significantly higher under the Morrison government. “We do have labour shortages and we do still have Covid absenteeism, and the international environment has become more challenging as well,” he told reporters. “There is no point tiptoeing around these serious economic challenges. There is no point mincing words about the sorts of conditions that we have inherited." “We have inherited high and rising inflation and rising interest rates, we’ve inherited falling real wages and we’ve inherited $1 trillion in debt.” He went on to say that the economy forecast was weaker in March than the Morrison government claimed at election time, while saying, “Consumption, dwelling investment, new business investment, exports and nominal GDP were all weaker in the March quarter than was anticipated by our predecessors.” “These national accounts are a glimpse of the mess that the former government left behind for us to clean up." “Obviously, we want the economy to recover strongly. Obviously, we want household consumption and other key elements of the national accounts to be as strong as possible. “But even when, on the surface, they might look stronger than they have been during the worst of Covid, they are still short of what the government was hoping for.” In relation to growing energy costs, Chalmers said there was a "perfect storm" of challenges facing the energy market. “These are the costs and consequences of almost a decade now of a government with 22 different energy policies failing to land the necessary certainty to improve the resilience of our energy markets,” he said. “This is the chickens coming home to roost when it comes to almost a decade now on climate change and energy policy failure from our predecessors." The Albanese government has been passionate about their climate change policy, with a strong goal of reaching net zero by 2050. Despite the government's passion for energy reform, financial experts have warned that growing oil and gas prices could plunge Australia into a recession before Christmas if radical change isn't made sooner rather than later. Chalmers also said that workers on a minimum wage should not be further disadvantaged through the ongoing cost of living crisis. “Minimum wage workers were in many cases the heroes of the pandemic. They shouldn’t be going backwards in this cost of living crisis,” he said. Although Labor are dedicated to reducing the cost of living, The Australian Bureau of Statistics (ABS) said global events – including the rolling conflict in Ukraine – would continue to impact the Australian economy in the months ahead. Image credits: Getty Images

News

Rebuilding Australia: what we can learn from the successes of post-war reconstruction

As Australia begins to plot a recovery strategy from the <a href="https://www.abc.net.au/news/2020-06-12/australia-100-days-out-from-economic-cliff-coronavirus-supports/12345710">first recession in the country in decades</a>, the Morrison government needs to examine what has worked well in the past. Crises require strong leadership, national cohesion and a framework for carrying out recovery efforts on a grand scale. As such, there is a case to be made for a new Commonwealth agency to lead the recovery effort, built on the model of the <a href="http://guides.naa.gov.au/land-of-opportunity/chapter2/">Department of Post-War Reconstruction</a> that helped Australia emerge from the turmoil of the second world war. The Department of Post-War Reconstruction In December 1942, Prime Minister John Curtin established the Department of Post-War Reconstruction. Even though the war was still raging, its task was to begin planning and coordinating Australia’s transition to a peacetime economy. The department brought together a talented group of officials, many of them from the new discipline of economics, to advise the government. Its establishment reflected the efforts to which the Commonwealth government went after the war to professionalise the Australian public service. The department did not have a large staff. It was devised as a policy department that would coordinate the work of other agencies. The treasurer, <a href="http://primeministers.naa.gov.au/primeministers/chifley/">Ben Chifley</a>, was appointed the first minister for post-war reconstruction. <a href="http://oa.anu.edu.au/obituary/coombs-herbert-cole-nugget-246">H. C. “Nugget” Coombs</a>, one of <a href="https://press.anu.edu.au/publications/series/anu-lives-series-biography/seven-dwarfs-and-age-mandarins">Australia’s “seven dwarfs”</a>, named for their diminutive stature, was <a href="https://press.anu.edu.au/publications/series/anu-lives-series-biography/seven-dwarfs-and-age-mandarins">his first departmental secretary</a>. One of the major successes of the department was its contribution to the <a href="http://www.billmitchell.org/White_Paper_1945/index.html">full-employment policy</a>, a goal set by post-war governments to achieve a higher standard of living and regular employment for all Australians after the war. To that end, the department helped establish a new employment agency, the <a href="https://en.wikipedia.org/wiki/Commonwealth_Employment_Service">Commonwealth Employment Service</a>, to match workers with jobs. It also helped overhaul the social welfare system and create the <a href="http://www.pbs.gov.au/pbs/home;jsessionid=rjwrtlmhk03g1jj37lpmf4ge3">pharmaceutical benefits scheme</a>. Full employment became a bipartisan policy goal throughout the economic “golden age” from the end of the war to the 1970s. The policy was so popular that even the smallest deviation from it, such as during the “credit squeeze” of 1960-61, <a href="https://theconversation.com/issues-that-swung-elections-the-credit-squeeze-that-nearly-swept-menzies-from-power-in-1961-115140">almost cost the Menzies government re-election</a>. The Department of Post-War Reconstruction didn’t succeed in pushing through sweeping new federal powers for reconstruction in a 1944 referendum. Nonetheless, it found ingenious ways to foster Commonwealth-state cooperation, for instance, through <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP0708/08rp17">section 96 grants</a> (which provided federal funding to the states on terms and conditions set by the Commonwealth), and the federal funding of housing, hospitals and later universities in the states. New Commonwealth-state bodies were also devised to support the coal and aluminium industries. The Commonwealth and NSW state <a href="https://www.coalservices.com.au/mining/about-us/history/">Joint Coal Board</a>, for example, completely revamped the almost moribund NSW black coal industry. A revived and mechanised NSW coal industry became internationally competitive and a <a href="https://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/09E60850418239F6CA2570A80011A395">significant export earner for Australia by the 1970s</a>. On the international front, Chifley and Coombs supported Australia’s participation in the <a href="https://2001-2009.state.gov/r/pa/ho/time/wwii/98681.htm">1944 Bretton Woods Conference</a>, which reinvented the global financial system based on fixed exchange rates with the US dollar as a reserve currency. The International Monetary Fund and the World Bank were also established at the time. Chifley and Coombs supported the new international arrangements because they understood the revival of the global economy was essential for Australia’s own prosperity. As they hoped, the Bretton Woods system, the <a href="https://www.wto.org/english/docs_e/legal_e/gatt47.pdf">General Agreement on Tariffs and Trade</a> (GATT) and the <a href="https://history.state.gov/milestones/1945-1952/marshall-plan">Marshall Plan</a> for western Europe all <a href="https://www.mup.com.au/books/jb-chifley-hardback">laid the global foundations for Australia’s domestic recovery</a>. How a post-pandemic agency might work The federal government has already trialled a new policy-making agency during the COVID-19 pandemic with its “wartime” National Cabinet, which featured federal and state governments and their agencies working as one. There are many ways a new economic recovery agency could build on the cohesion demonstrated by the National Cabinet and advise the Commonwealth government on rebuilding the economy. Specifically, it could <a href="https://taxpolicy.crawford.anu.edu.au/files/uploads/taxstudies_crawford_anu_edu_au/2015-06/julie_smith_paper_final_27-28_april_2015.pdf">help replicate Curtin’s achievement</a> in 1942 by advising on comprehensive reform of the Commonwealth-state taxation system. This process is already under way with several states calling for the <a href="https://mckellinstitute.org.au/app/uploads/McKell_Stamp_Duty_Land_tax.pdf">substitution of land taxes for stamp duties</a>. A post-COVID-19 agency could also be involved in the revamping of the welfare system (post-JobKeeper/JobSeeker) to cope with the higher levels of unemployment and under-employment. The agency could advise or coordinate a strategy for new infrastructure to create jobs, such as the building of hospitals, public housing and a transition to cleaner energy. Another possibility would be a return to independent petroleum refining, similar to <a href="https://en.wikipedia.org/wiki/Commonwealth_Oil_Refineries">Billy Hughes’s Commonwealth Oil Refineries</a> that operated from 1919-52. And a new agency could advise on reviving other major industries, such as tourism, the airlines, the higher education sector and even the banking system. During the Global Financial Crisis, the Rudd government had to <a href="https://kevinrudd.com/2008/10/14/financial-crisis-kevin-rudd-address-to-the-nation/">underwrite loans to the banks and guarantee bank deposits</a>. A major intervention may again be required. Creating a Department of Post-War Reconstruction was considered by some to be the “<a href="https://www.newsouthbooks.com.au/books/australias-boldest-experiment/">boldest experiment</a>” the country took after the war. And as a result, Australia’s post-war recovery was a remarkable success. This is what we need now – another bold experiment, in the spirit of bipartisanship. Written by David Lee. Republished with permission of <a href="https://theconversation.com/rebuilding-australia-what-we-can-learn-from-the-successes-of-post-war-reconstruction-137899">The Conversation.</a>

Travel Tips

The economy in 7 graphs: How a tightening of wallets pushed Australia into recession

A go-slow on spending sent the economy backwards <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0">0.3%</a> in the first three months of this year, only the fourth such decline since Australia was last in recession in the early 1990s. Treasurer Josh Frydenberg says Treasury has told him the next three months, the June quarter that we are in at present, will see a “<a href="http://www.tveeder.com/560/byrange?&from=1591149600&to=1591160400">far more severe</a>” contraction, one private sector forecasters believe could be as <a href="https://markets.jpmorgan.com/research/email/vbiu7qlb/drUs2ufOlPXL2o6BhGXEoQ/GPS-3389715-0">high as 10%</a>. Asked whether that meant Australia was already in recession, he said it did. <hr /> Quarterly GDP growth since 1990 <a href="https://images.theconversation.com/files/339399/original/file-20200603-133924-qy356o.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339399/original/file-20200603-133924-qy356o.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0" class="source">ABS 5206.0</a> <hr /> Most unusually for an economic downturn, incomes <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5206.0Main%20Features2Mar%202020?opendocument&tabname=Summary&prodno=5206.0&issue=Mar%202020&num=&view=">rose</a> throughout the quarter, pushed higher by a 6.2% increase in government payments related to COVID-19 and the bushfires, and an 11.1% increase in insurance payouts as a result of bushfires and hailstorms. Household incomes even rose in per capita terms, by 0.1% after abstracting for population growth. But rather than spend more, Australian households dramatically increased saving in the quarter, pushing the household saving ratio up from 3.5% to 5.5% and pushing down household spending 0.2%. <hr /> Household savings ratio <a href="https://images.theconversation.com/files/339403/original/file-20200603-130940-1ygbyfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339403/original/file-20200603-130940-1ygbyfb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Commonwealth Treasury <hr /> Spending on goods actually increased over the three months as Australians stocked up on essentials including toilet paper in March. The production of “petroleum, coal, chemical and rubber products” surged <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5206.0Main%20Features6Mar%202020?opendocument&tabname=Summary&prodno=5206.0&issue=Mar%202020&num=&view=">8.1%</a> as consumers stocked up on cleaning and disinfectant products. But spending on services plummeted, led down by dramatic falls in spending on transport and hotels, cafes and restaurants. <hr /> Household consumption, March quarter <a href="https://images.theconversation.com/files/339388/original/file-20200603-133851-1ypiv4d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339388/original/file-20200603-133851-1ypiv4d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Commonwealth Treasury <hr /> Spending on transport services (airlines and the like) fell 12.0%. Spending on hotels, cafes and restaurants fell 9.2%, each the biggest fall on record. “Production” in these industries fell 4.9% and 7.5%. Profits fell 6.8% and 14.2%. Spending fell on ten of the 17 consumption categories. <hr /> Household consumption by category, March quarter <a href="https://images.theconversation.com/files/339394/original/file-20200603-133875-s4trbq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339394/original/file-20200603-133875-s4trbq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Commonwealth Treasury <hr /> Most of the changes took place at the very end of the March quarter. A new index of the “stringency” of COVID-19 containment measures released with the national accounts shows these ramped up only in the final two weeks. Most have been in place for the entirety of the June quarter to date, suggesting the impacts on spending and production will be a “<a href="http://www.tveeder.com/560/byrange?&from=1591149600&to=1591160400">lot more substantial</a>”, in the words the treasurer used in the national accounts press conference. <hr /> ABS stringency of containment measures index <a href="https://images.theconversation.com/files/339412/original/file-20200603-130951-fwjz4q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339412/original/file-20200603-130951-fwjz4q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5206.0Main%20Features10Mar%202020?opendocument&tabname=Summary&prodno=5206.0&issue=Mar%202020&num=&view=" class="source">ABS 5206.0</a> <hr /> Were it not for government spending, which has climbed 6.2% throughout the year, the plunge in March-quarter GDP would have been much more severe. Calculations of the Bureau of Statistics suggest it would have been <a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5206.0Main%20Features4Mar%202020?opendocument&tabname=Summary&prodno=5206.0&issue=Mar%202020&num=&view=">twice as severe</a>, a March quarter decline of 0.6% rather than 0.3%. <hr /> General government expenditure <a href="https://images.theconversation.com/files/339413/original/file-20200603-130929-jaamqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339413/original/file-20200603-130929-jaamqk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Commonwealth Treasury <hr /> The treasurer described Australia as “on the edge of the cliff” in the March quarter, facing “<a href="http://www.tveeder.com/560/byrange?&from=1591149600&to=1591160400">an economist’s version of Armageddon</a>”. The treasury had been contemplating a fall in gross domestic product of 20% in the June quarter. Australia has avoided that fate by acting on health and the economy early. Its fall in GDP of 0.3% in the March quarter was one-third the OECD average. <hr /> International comparisons, real GDP growth, March quarter <a href="https://images.theconversation.com/files/339391/original/file-20200603-133919-10kfhyf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img src="https://images.theconversation.com/files/339391/original/file-20200603-133919-10kfhyf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /></a> Commonwealth Treasury <hr /> The treasurer has scheduled an <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/update-economic-and-fiscal-outlook">economic update</a> for July 23 which will include the result of a review of the JobKeeper program. Asked whether it could be referred to as a mini-budget, he said it could be. <a href="https://theconversation.com/profiles/peter-martin-682709">Peter Martin</a>, Visiting Fellow, <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292">Crawford School of Public Policy, Australian National University</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/the-economy-in-7-graphs-how-a-tightening-of-wallets-pushed-australia-into-recession-139960">original article</a>.

Retirement Income

How will the coronavirus recession compare with the worst in Australia’s history?

In a normal year we would be weeks away from the May budget and the official forecasts for the financial year ahead. This year there will be no official forecasts until October 6, the date of the postponed budget. It might be just as well. The finance minister Mathias Cormann says it is <a href="https://www.financeminister.gov.au/transcript/2020/04/08/abc-radio-national-breakfast">nigh impossible to make realistic and credible forecasts</a> in the current environment. He might also be worried that publishing negative forecasts creates the risk of self-fulfilling prophecies. (It’s an important difference between economic and weather forecasting – predicting rain does not make rain more likely.) But on Tuesday Treasurer Josh Frydenberg saw fit to release details of Treasury forecasts of a <a href="https://www.smh.com.au/politics/federal/unemployment-to-hit-10-per-cent-1-4m-aussies-out-of-work-treasury-20200413-p54jd6.html">10%</a> rate of unemployment, which he said would have been 15% were it not for the JobKeeper allowance, so such concern can’t be universal. Even before COVID-19, the Australian economy was tepid, with the bushfires and weak wages growth dampening consumer spending. Now the cat is out of the bag. Overnight the International Monetary Fund released shocking <a href="https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020">updated forecasts</a>. Australia’s 2020 recession will dwarf those that came before it. <hr /> Australian calendar year economic growth <img src="https://images.theconversation.com/files/327983/original/file-20200415-153302-1x818d8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" alt="" /> Growth through the year to December, IMF through-the-year-forecasts for 2020, 2021. <a href="https://www.imf.org/~/media/Files/Publications/WEO/2020/April/English/StatsAppendixA.ashx" class="source">ABS National Accounts, IMF World Economic Outlook April 2020</a> <hr /> The IMF expects real gross domestic product to shrink by <a href="https://www.imf.org/%7E/media/Files/Publications/WEO/2020/April/English/StatsAppendixA.ashx">7.2%</a> throughout 2020. This is much larger than the falls in real GDP in the early 1980s drought-related recession (2.2% throughout 1982) or “<a href="https://www.smh.com.au/opinion/twentyfive-years-on-from-the-recession-we-had-to-have-20151201-glc9kn.html">the recession we had to have</a>” (1% in 1991). To find larger falls it is necessary to go back to the depressions of the 1890s and 1930s. The Great Depression is one parallel Australia’s <a href="https://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf">1890s depression</a> was the result of a global slowdown, the bursting of a speculative property bubble (particularly in Melbourne), bank failures and the prolonged <a href="https://www.nma.gov.au/defining-moments/resources/federation-drought">Federation Drought</a>. Australia’s 1930s <a href="https://www.britannica.com/event/Great-Depression">Great Depression</a> also followed some speculative excesses but was primarily a response to the global economic slump. Both depressions predated the acceptance of <a href="https://www.investopedia.com/terms/k/keynesianeconomics.asp">Keynesian economics</a> in which it was understood that the best way to deal with a decline in private spending was for governments to increase public spending. Instead, back then, governments tried to get their budgets to balance by cutting their spending, making matters worse. Those depressions occurred well before statistical agencies compiled national accounts. But a survey of <a href="https://www.researchgate.net/publication/282613606_Business_Cycles_in_Australia">retrospective estimates</a> I did with Robert Ewing suggested that during the Great Depression real GDP may have contracted by 10% to 20%. The Asian Economic Crisis is another A more recent parallel to the size of the current fall in Australia’s GDP is the experience of some of our neighbours in the <a href="https://www.rba.gov.au/publications/rdp/1998/9805.html">1997 Asian financial crisis</a>. In 1998 it brought about huge falls in real GDP in Indonesia (13%), Thailand (8%), Malaysia (7%), Hong Kong (6%) and South Korea (5%). The current contraction has been unusually rapid and it is hoped that the recovery will be too. The IMF predicts Australia’s GDP will expand by <a href="https://www.imf.org/%7E/media/Files/Publications/WEO/2020/April/English/StatsAppendixA.ashx">8.4%</a> in 2021 after falling 7.2% in 2020. It believes we are in the worst of the recession now and the recovery will begin in the September quarter that starts in July. In year-average terms that understate the size of swings the IMF expects real GDP to shrink 6.7% in 2020 compared with 2019 and then to grow 6.1% in 2021 compared to 2020. It has revised down its forecast for global growth this year from an increase of 3% to a contraction of 3%. (By contrast, during the global financial crisis global GDP slipped by only 0.1%) What it terms the “Great Lockdown” is the worst global economic scenario since the Great Depression. Worse outcomes “possible, even likely” The US economy should contract 5.9% this year before bouncing back 4.7% in 2021. China’s economy should barely grow in 2020 (1.2%) before bouncing back 9.2% in 2021. Output and incomes in emerging economies are predicted to return to pre-pandemic levels in the second half of the year. The advanced economies generally won’t return to where they were until the end of 2021. These are forecasts that might prove optimistic. Depending on conditions and programmes in place in each country, it is likely many business will not survive and many consumers will decide to remain cautious about their spending for some time. IMF chief economist Gita Gopinath <a href="https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020">warns</a> <blockquote> much worse growth outcomes are possible and may be even likely – this would follow if the pandemic and containment measures last longer, emerging and developing economies are even more severely hit, tight financial conditions persist, or if widespread scarring effects emerge due to firm closures and extended unemployment. </blockquote> Rarely has the trajectory of a downturn been harder to forecast. Much will depend on the virus itself, on the way in which countries adjust their restrictions to deal with it, and on us. At the moment few of us are feeling good.<img style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;" src="https://counter.theconversation.com/content/136379/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" /> <a href="https://theconversation.com/profiles/john-hawkins-746285">John Hawkins</a>, Assistant Professor, School of Politics, Economics and Society, <a href="https://theconversation.com/institutions/university-of-canberra-865">University of Canberra</a> This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/how-will-the-coronavirus-recession-compare-with-the-worst-in-australias-history-136379">original article</a>.

Retirement Income

“Retail sector in recession”: Warning issued for Australia’s oldest department stores

Australia’s population is multiplying day by day, and with prices getting higher, Australia’s economy is in its third decade of continuous recession-free growth. But there’s still one industry that’s suffering significantly: The retail sector. Department stores are some of the oldest businesses in Australia, with Myer established in 1900, David Jones in 1838, Target in 1926 and Kmart in 1968. These stores are notably older than retailers such as Uniqlo and other brands that have only recently made their way Down Under. But despite their age and reputation, those stores are dwindling, regardless of whether they’re high-end or budget friendly. Only last week, David Jones announced the value of their business to be $437 million, with the owner admitting the business isn’t as profitable as they originally believed. “The retail sector in Australia is currently in recession,” said a spokesman for Woolworths South Africa, which bought the department store in 2014. The decrease in numbers for David Jones was a warning to rival Myer, who began to sell their stock, causing the company’s share prices to fall, reversing what appeared to be an improvement earlier in the year. So what went wrong? Throughout the country, stores have been selling the same amount of stock they did 10 years ago. Some say it was the introduction of the internet that spelt doom for department stores, as it allowed for customers to do more research on whether or not they were getting the best price. And if you look at businesses who have well-defined offerings, for example JB Hi-Fi for electronics, ALDI for groceries and Bunnings for home items, their sales are increasing by the day. But despite it being difficult to remain relevant, department stores are here to stay. While the growth has stopped, it doesn’t mean big businesses are ready to close shop, unlike Barney’s in the US who declared bankruptcy last week. Each month, department stores are selling $1.5 billion worth of items each month, the problem lies in the fact that our population and our bank balances are increasing each year, so the items sold to each person have become smaller. Myer’s sales from the first half of the financial year are 7 per cent lower than they were in the same period 10 years ago. But regardless, they are still making profit, it’s just 65 per cent lower. But not every department store is expected to hang on. Take Big W for example, who after years of trading, are slowly closing down their stores due to a decrease in sales. 30 Big W stores are expected to close over the next three years, with the business assumed to report a loss before interest and tax of $80-$100 million this financial year. But perhaps the most important store of all is Kmart, being the shining light for a long time. As shoppers went Kmart mad due to their bargain items, a craze began as people started Facebook groups revealing their favourite Kmart hacks. But then the growth stopped, as in the most recent trading update, Kmart’s comparable sales fell 0.2 per cent. While Kmart is continuing to open new stores, they aren’t experiencing much growth. If the business begins to follow in the same path as other department stores, that will be a cause for concern, with sales not going up by much, but not going down either.

Money & Banking

What the Reserve Bank can do if interest rates get cut to zero

With its official cash rate now expected to fall below 1% to a new extraordinarily low close to zero, all sorts of people are saying that the Reserve Bank is in danger of “<a href="https://www.reuters.com/article/us-australia-economy-rba-analysis/australias-shrinking-monetary-policy-arsenal-tests-rbas-orthodoxy-idUSKCN1S90CL">running out of ammunition.</a>” Ammunition might be needed if, as during the last financial crisis, it needs to cut rates by several percentage points. This view assumes that when the cash rate hits zero there is nothing more the Reserve Bank can do. The view is not only wrong, it is also dangerous, because if taken seriously it would mean that all of the next rounds of stimulus would have to be come from fiscal (spending and tax) policy, even though fiscal policy is probably ineffective long-term, its effects being <a href="https://www.mercatus.org/publication/why-fiscal-multiplier-roughly-zero-0">neutralised by a floating exchange rate</a>. The experience of the United States shows that Australia’s Reserve Bank could quite easily take measures that would have the same effect as cutting its cash rate a further 2.5 percentage points – that is: 2.5 percentage points below zero. In a report <a href="https://www.ussc.edu.au/analysis/lessons-from-quantitative-easing-in-the-united-states-a-guide-for-australian-policymakers">released</a> by the University of Sydney’s United States Studies Centre, I document the successes and failures of the US approach to so-called “quantitative easing” (QE) between 2009 and 2014. It demonstrates that it is always possible to change the instrument of monetary policy from changes in the official interest rate to changes in other interest rates by buying and holding other financial instruments such as long-term government and corporate bonds. The more aggressively the Reserve Bank buys those bonds from private sector owners, the lower the long-term interest rates that are needed to place bonds and the more former owners whose hands are filled with cash that they have to make use of. In the US the Federal Reserve also used “<a href="https://www.federalreserve.gov/monetarypolicy/timeline-forward-guidance-about-the-federal-funds-rate.htm">forward guidance</a>” about the likely future path of the US Federal funds rate to convince markets the rate would be kept low for an extended period. It is unclear which mechanism was the most powerful, or whether the Fed even needed to buy bonds in order to make forward guidance work. However in a stressed economic environment, it is worth trying both. As it comes to be believed that interest rates will stay low for an extended period, the exchange rate will fall, making it easier for Australian corporates to borrow from overseas and to export and compete with imports. The consensus of the academic literature is that QE cut long-term interest rates by around one percentage point and had economic effects equivalent to cutting the US Federal fund rate by <a href="https://www.ussc.edu.au/analysis/lessons-from-quantitative-easing-in-the-united-states-a-guide-for-australian-policymakers">a further 2.5 percentage points</a> after it approached zero. QE need not have limits… Based on US estimates, Australia’s Reserve Bank would need to purchase assets equal to around 1.5% of Australia’s Gross Domestic Product to achieve the equivalent of a 0.25 percentage point reduction in the official cash rate. That’s around A$30 billion. With over A$780 billion in long-term government (Commonwealth and state) securities on issue, there’s enough to accommodate a very large program of Reserve Bank buying, and the bank could also follow the example of the Fed and expand the scope of purchases to include non-government securities, including residential mortgage-backed securities. It could also learn from US mistakes. The Fed was slow to cut its official interest rate to near zero and slow to embark on QE in the wake of the 2008 financial crisis. Its first attempt was limited in size and duration. Its success in using QE to stimulate the economy should be viewed as the lower bound of what’s possible. Even if it becomes less effective as it grows It often <a href="https://www.abc.net.au/news/2019-06-16/interest-rates-are-going-down-but-how-low-can-they-go/11210682">suggested</a> (although it is <a href="https://www.rba.gov.au/publications/confs/2017/borio-hofmann.html">by no means certain</a>) that monetary policy becomes less effective when interest rates get very low, but this isn’t necessarily an argument to use monetary policy less. It could just as easily be an argument to use it more. Because there is no in-principle limit to how much QE a central bank can do, it is always possible to do more and succeed in lifting inflation rate and spending. Fiscal policy may well be even less effective. To the extent that it succeeds, it is likely to push up the Australian dollar, making Australian businesses less competitive. US economist <a href="https://www.mercatus.org/publication/why-fiscal-multiplier-roughly-zero-0">Scott Sumner</a> believes the extra bang for the buck from government spending or tax cuts (known as the multiplier) is close to zero. Reserve Bank Governor Philip Lowe this month appealed for <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-06-04.html">help from the government itself</a>, asking in particular for extra spending on infrastructure and measures to raise productivity growth. He is correct in identifying the contribution other policies can make to driving economic growth. No one seriously thinks Reserve Bank monetary policy can or should substitute for productivity growth. But it is a good, perhaps a very good, substitute for government spending that does not contribute to productivity growth. Three myths about quantitative easing In the paper I address several myths about QE. One is that it is “printing money”. It no more prints money than does conventional monetary policy. It pushes money into private sector hands by adjusting interest rates, albeit a different set of rates. Another myth is that it promotes inequality by helping the rich to get richer. It is a widely believed myth. Former Coalition treasurer <a href="https://www.afr.com/news/economy/monetary-policy/murdoch-criticises-central-bank-stimulus-20141017-119n1f">Joe Hockey</a> told the British Institute of Economic Affairs in 2014 that: Loose monetary policy actually helps the rich to get richer. Why? Because we’ve seen rising asset values. Wealthier people hold the assets. But it widens inequality no more than conventional monetary policy, and may not widen it at all if it is successful in maintaining sustainable economic growth. A third myth is that it leads to excessive inflation or socialism. In the US it has in fact been associated with some of the lowest inflation since the second world war. These days central banks are more likely to err on the side of creating too little inflation than too much. Some have argued that QE in the US is to blame for the rise of left-wing populists like Alexandria Ocasio-Cortez and “<a href="https://realconservativesunite.com/2019/03/07/ben-bernanke-the-father-of-extreme-us-socialism/">millennial socialism</a>”. But it is probably truer to say that their grievances grew out of too tight rather than too lose monetary policy. QE has been road tested. We’ve little to fear from it, just as we have had little to fear from conventional monetary policy. Written by Stephen Kirchner. Republished with permission of <a rel="noopener" href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843" target="_blank">The Conversation</a>.

Money & Banking

Why we’ll have ourselves to blame if we fall into a recession

The facts are not in dispute. Annual GDP growth has fallen to <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/5206.0">1.8%</a>. On a per-capita basis we have had three consecutive quarters of negative growth. The last time that happened was during the drought and recession of <a href="https://theconversation.com/expect-weak-economic-growth-for-quite-some-time-what-wednesdays-national-accounts-tell-us-118273">1982</a>, almost four decades years ago. The most recent inflation reading was literally <a href="https://theconversation.com/vital-signs-zero-inflation-means-the-reserve-bank-should-cut-rates-as-soon-as-it-can-on-tuesday-week-115931">zero</a>. Real wage growth has been stagnant <a href="https://theconversation.com/this-is-what-policymakers-can-and-cant-do-about-low-wage-growth-101025">for six years</a>. Household debt is nearly <a href="https://bit.ly/2K0KbIZ">double</a> disposable income. And underemployment is <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">more than 8%</a>, on top of a 5.2% rate of unemployment. What is in dispute is what to do about it. We’ve entered secular stagnation After being been told for years that the economy is in good shape and that we are <a href="https://www.businessinsider.com.au/video-prime-minister-malcolm-turnbull-on-his-1-billion-ideas-boom-2015-12">“transitioning away from the mining boom”</a>, it’s time to face the reality that, like most advanced economies, we are in a low-growth, low-interest rate, low-inflation trap. Former US Treasury Secretary Larry Summers has argued for some time that advanced economies, almost universally, are suffering from what he calls “<a href="https://theconversation.com/secular-stagnation-its-time-to-admit-that-larry-summers-was-right-about-this-global-economic-growth-trap-112977">secular stagnation</a>” — a protracted period of low growth caused by too much savings chasing too few productive investment opportunities. If the description applies to us, and it does, there are only two ways to escape it. We’ve two options One is unconventional monetary policy: measures that have the effect that pushing interest rates below zero would have. The other is aggressive fiscal policy: either big (and if necessary, repeated) tax cuts or a big (and if necessary, repeated) boost in government spending, each of which would put the <a href="https://theconversation.com/vital-signs-when-it-came-to-the-surplus-both-bill-and-scott-were-having-a-lend-116806">surplus</a> at risk. What would an aggressive-enough monetary policy look like? The starting point is a concept known as the “equilibrium real interest rate”. It’s the real (inflation-adjusted) rate of interest consistent with stable macroeconomic performance (which means full employment without financial bubbles). 1. Aggressive monetary policy There is <a href="https://www.brookings.edu/wp-content/uploads/2019/03/On-Falling-Neutral-Real-Rates-Fiscal-Policy-and-the-Risk-of-Secular-Stagnation.pdf">compelling evidence</a> that in advanced economies such as Australia the equilibrium real interest rate is negative. But getting there in a low-inflation environment is hard. The Reserve Bank can, if it chooses, set the cash rate as low as 0% (<a href="https://theconversation.com/the-reserve-bank-will-cut-rates-again-and-again-until-we-lift-spending-and-push-up-prices-118263">this week it cut it to 1.25%</a>) but it can’t safely move it much lower than zero. If it did, if people and firms found themselves having to pay money in order to keep money in banks, they might simply take their money out, giving the Reserve Bank even less control. This problem is known as the “zero lower bound”. It means that if the bank needs to cut rates beyond than zero it’ll probably have to do something else that has a similar effect. The most likely candidate is “<a href="https://theconversation.com/now-is-the-time-to-plan-how-to-fight-the-next-recession-111497">quantitative easing</a>” (QE), whereby the central bank buys long-term government bonds and other securities from investors that have them, effectively forcing cash into their hands, which the zero interest rate means they have little choice but to spend. It shows up in lower longer-term interest rates (rates for borrowing 5, 10 or even 30 years into the future) and should boost spending and borrowing just as much as cutting short-term rates. There are at least three difficulties with QE in Australia. The first is that because the Reserve Bank has never done it before, there are questions about how it would mechanically execute on it. The United States and European experience is helpful in providing a template. The second difficulty is getting out. Nobody, including the US Federal Reserve, really knows what happens when QE is unwound. Third, if secular stagnation persists, then QE needs to be a long-term strategy. But is it possible for a central bank to expand its balance sheet buying bonds and securities indefinitely, even if it was buying them at a modest pace? Again, nobody knows. 2. Aggressive fiscal policy If nothing else, the headaches with monetary policy suggest that fiscal policy might be an attractive alternative. It might also be more effective. As Reserve Bank governor Philip Lowe noted <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-06-04.html">in a speech on Tuesday</a>, done in a good way government spending on infrastructure could both boost the economy and boost longer term productivity, giving a double benefit. It could be complemented by “structural policies that support firms expanding, investing, innovating and employing people”. It’s hard to argue with Lowe’s logic. So hard in fact that some of us have been saying <a href="https://www.afr.com/opinion/big-project-spending-a-good-way-to-kickstart-stagnant-economy-20150819-gj2i7v">exactly what he just said for some time</a>. A quicker way to boost the economy would be to splash cash, either as Kevin Rudd did in the form of cash payments during the global financial crisis, or in the form of <a href="https://theconversation.com/its-the-budget-cash-splash-that-reaches-back-in-time-114188">tax offsets</a> of the kind the Morrison government announced in the 2018 and 2019 budgets. Delivered straight into bank accounts, both have <a href="https://theconversation.com/election-tip-23-9-is-a-meaningless-figure-ignore-the-tax-to-gdp-ratio-115432">much the same effect</a>, even though one is classified as spending and the other as cutting tax. The obstacle to doing such things is this government’s – make that this country’s – obsession with balanced budgets. The surplus can wait I have <a href="https://theconversation.com/vital-signs-do-deficits-matter-any-more-112680">argued strongly</a> and still believe that debt and deficits do matter, but at the moment we are in serious danger of falling into recession. That makes it imperative to act. Given the politics of budget deficits and the narratives around economic management, it might be that the burden of action falls on the organisation the least able to pull it off in the present circumstances. That’s the Reserve Bank. If Australia does dip into recession in the next year or two it will be an unforced error. Not only would the government be responsible for it by not having taken strong enough action on spending when it could, the bank would also be responsible by taking action too late and letting things get to the stage where it had to act while interest rates were near zero. Written by Richard Holden. Republished with permission of <a href="https://theconversation.com/vital-signs-if-we-fall-into-a-recession-and-we-might-well-have-ourselves-to-blame-118387">The Conversation</a>.

Money & Banking

Now is the time to plan how to fight the next recession

Australia’s nearly three decades of uninterrupted economic growth won’t last forever. Sooner or later policymakers will need to respond to a downturn that could come from any number of sources. A severe downturn in our main trading partner, China, a collapse of the local property market, global financial turmoil, or an unfortunate confluence of multiple factors are all possible triggers. The real question is not whether or even when a recession will come, but how well positioned we will be to respond. And, unfortunately, the answer right now is “not very”. To understand what will be required to battle the next Australian recession it’s useful to distinguish between two broad types of economic trouble. 1. Two types of threat The first is what one might call a “run-of-the-mill business cycle downturn”. Think Australia, 1990. In this scenario interest rates are raised to ward off inflation but eventually choke off business investment and private spending. Unemployment rises and GDP falls. The central bank responds by cutting interest rates, and the federal government responds with “Keynesian” economic stimulus (extra government spending and/or tax cuts). The second type of trouble is different, what might be called “mass financial panic”. Think the United States in 2008. In this scenario an event (such as massive mortgage defaults) causes financial institutions to fail. If those financial institutions are connected to others then the entire financial system seizes up because everyone stops lending money to each other at once. It’s like a car going from 100km/h to 5km/h in half a second. It hurts. The Keynesian response is completely insufficient in these circumstances. What’s needed is to get credit moving again. And this requires people not only believing that they should lend money, but also believing that others will lend money, keeping the economy afloat and making the exercise worthwhile. Coordinating what economists refer to as “<a href="http://personal.lse.ac.uk/dasgupt2/hob_main.html">higher-order beliefs</a>” requires overwhelming financial force. It’s a kind of <a href="https://www.carnegiecouncil.org/education/008/expertclips/005">Powell doctrine</a> in which the US went in with far more troops than it needed after Iraq’s invasion of Kuwait in the early 1990s in order to overwhelm the enemy.<a href="http://theconversation.com/vital-signs-the-gfc-and-me-ten-years-on-what-have-we-learned-103514"></a> It was the thinking behind then US Treasury Under Secretary Larry Summers’ <a href="https://www.newyorker.com/magazine/2009/10/12/inside-the-crisis">US$50 billion rescue package to head off the Mexican peso crisis in 1994</a>, and what then US Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Hank Paulson did to avoid a repeat of the Great Depression in 2008. 2. The Reserve Bank is less than prepared How well is Australia prepared to respond quickly in either of these scenarios? Scenario 1 requires the Reserve Bank to cut interest rates and the government to spend money fast. With interest rates already at an historically low 1.50% – and perhaps lower by the time trouble arises – there’s little room left to cut further. Unorthodox measures might be necessary, like so-called “quantitative easing”. This involves large purchases of long-term bonds to flood markets with money. While there is now experience from the US and Europe about how to do this, in Australia the Reserve Bank would be breaking new ground. Getting into such a program is not simple, and getting out might be very complicated. But of course jacking up interest rates now to give the bank room to cut later isn’t a solution. That could trigger a recession itself. The bank has to grapple with how to respond to even a standard recession in the new age <a href="http://larrysummers.com/category/secular-stagnation/">of permanently low real interest rates</a>. 3. We’ve money to spend, but not the means The government’s fiscal response requires having the capacity to run large budget deficits, which means being able to borrow. Australia’s capacity to borrow is currently good, with <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/DebtPosition">net debt as a proportion of gross domestic product at around 19.2%</a>. This is low by both international and historical standards. A former chair of President Obama’s Council of Economic Advisers, Christina Romer, and one of the world’s leading macroeconomists, David Romer, have <a href="https://eml.berkeley.edu/~dromer/papers/Romer&RomerCrisesandPolicyRevised.pdf">persuasively documented</a> how vital such “fiscal capacity” is. Australia gets an A on that count. But a cash splash needs to be spent, and fast. That means having “shovel-ready projects” lined up ahead of a recession hitting. Sending cheques to households is easy, but is often used to pay down debt or offset other expenditures rather than on spending. 4. We need to prepare ahead A proposal being pursued by the <a href="http://www.grandchallenges.unsw.edu.au/">New Economic Equality Initiative</a> at the University of NSW is to prepare in advance of a recession a “green stimulus” plan. It would be a list of significant environmental expenditures — from tree planting to waterway cleanups, to cycle-path construction to dune repair — that would be documented and ready to implement immediately.<a href="http://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315"></a> These would be projects that would stimulate demand but also have a high social return. To do them right would take planning ahead of time. It can’t be done well on the fly when a recession has already hit. Otherwise, well, think pink batts. Preparing for a financial crisis as opposed to a mere recession is harder. Having the budget capacity to provide massive guarantees of bank deposits and other financial obligations is a must. 5. Last time, we got lucky Equally important, though, is having regulatory agencies that can see trouble ahead and act swiftly. The Reserve Bank did an outstanding job a decade ago, but next time it won’t have then Treasury Secretary Ken Henry on the board and Kevin Rudd in the prime minister’s chair. The Australian Securities and Investments Commission has shown itself to be functionally incompetent over an extended period, as the Hayne Royal Commission highlighted all too clearly. Capacity-building is a prerequisite for an effective response to a future crisis. Regulators need to understand the interconnectedness of different financial institutions, the types of risk they are exposed to, where their funding is coming from and more. To some extent they need to know what they don’t know. It’s a big ask, but it is vital. In many ways Australia got lucky in 2008. The Reserve Bank had a lot of room to slash interest rates and did it aggressively. The government had close to zero net debt and could spend fast. Ken Henry’s aphorism, “go early, go hard, go households” was heeded by an unusually intellectually curious and adept prime minister. China – our biggest trading partner – enacted an aggressive stimulus plan of its own. The US Federal Reserve Chair just happened to be the world’s leading expert on the 1929 Great Depression, and the US Treasury Secretary was the former head of Goldman Sachs, an eminence of the banking world. Our response at home was matched by a near-perfect response abroad. We won’t be that lucky again. Now is the time to plan how to fight the next recession. Written by Richard Holden. Republished with permission of <a href="https://theconversation.com/now-is-the-time-to-plan-how-to-fight-the-next-recession-111497">The Conversation.</a>

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