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Are we boiling a frog?

David Bassanese
Wednesday, October 07, 2015

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By David Bassanese

Over the past week I’ve done a little data digging in a bid to try and better understand Australia’s current economic plight as compared to past cycles of performance. As I’ll reveal, in several regards, Australia’s recent economic performance has been quite unusual. 

For starters, perhaps the single best indicator of Australian economic cycles is movements in the “trend” unemployment rate since the late 1970s. As seen in the chart below, the past few decades up until the global financial crisis were characterised by two large recessions – in the early 1980s and early 1990s, when the unemployment rate rose by around 4 percentage points. 

There have also been three so-called “mid-cycle slowdowns” in the mid-1980s, mid-1990s and 2000-01, which saw the unemployment nudged up by an average of 0.5 percentage points each time. The rest of the time was marked by long economic booms that pushed the unemployment rate down.  

Against this background, the GFC period stands out as somewhere between a classic recession and mid-cycle slowdown – with the trend quarterly unemployment rate rising by 1.6 percentage points. This was followed by a relatively short recovery period after which the unemployment rate began rising again from early 2011.

Let’s dig deeper. As seen in the table below, annualised quarterly growth in trend GDP since the slowdown began in March 2011 has been 2.8% - or only a bit less than the 3.2% average growth in the three pre-GFC mid-cycle slowdowns. 

What’s remarkable about the table above, however, is that despite weaker GDP growth, total hours worked has been stronger in this slowdown – which in turn reflects both relatively strong growth in employment and average hours worked. This has meant the annualised rise in the unemployment rate of 0.3 percentage points per year has been less than half that averaged in previous pre-GFC mid-cycle slowdowns. 

The strength in hours worked relative to GDP is reflected in weaker productivity growth. And looking at the components of growth, the weakness in productivity growth could reflect the fact that housing construction has fared better than business investment in the current slowdown. 

I’d also note that growth in the working-age population – which some seek to blame for the current growth slowdown – is not that that different from past slowdowns. In fact, working-age population growth has been remarkably similar across past boom and bust periods.

All up, we’ve basically been in the same low growth cycle for the past four years. What stands out in the current slowdown, compared to past mid-cycle slowdowns, is that it has so far lasted four time longer, and the rise in the unemployment each quarter has been only half as fast – which in turn reflects weaker productivity growth and our recent reliance on the labour-intensive housing construction sector.

That said, the cumulative rise in the unemployment rate has still been 1.2 percentage points, which is more than twice the average in past mid-cycle slowdowns. 

What this says about the future is still a bit unclear – but it does highlight the importance of keeping the home building boom going until such time as business investment starts to recover

As I’ve noted here previously, my greatest fear is that the housing sector could be running out of puff, while non-mining business investment intentions have yet to turn up convincingly.  

Yet because the rise in unemployment is so gradual, we’ve not had a sense of national crisis that might have sparked greater concern from Canberra. That’s why I like to describe Australia’s current predicament as akin to the boiling frog – the water temperature is rising so gradually that the frog does not react in time to prevent itself being cooked!

Published: Wednesday, October 07, 2015

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