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Spooky definitions

To normal people economists might seem boring, but when they’re running around making declarations of recession it can lead to some exciting disagreements. It especially has more significance when it could impact negatively on confidence in the economy, when confidence is the key.

And it’s even worse when the basis of the recession call rests on the dodginess of numbers.
Australia not in recession
Enough of this long-winded introduction, let’s get down to the issues.

Shane Oliver, AMP’s head of investment strategy and chief economist surprised me after the release of the December quarter economic growth numbers by saying Australia is in recession, when on official figures and definitions, it’s not.

Sticking to the rules of defining a recession — that is, two quarters or six months of negative growth — it just has not happened.

You see, the September quarter was a weak 0.1 per cent positive growth but over the three months to the end of December we went backwards. We have a recession on the horizon but it’s not there yet.

Eight years ago after the introduction of the GST and post-Olympics we had one quarter of negative growth and missed a recession. My memory could be letting me down but I can’t recall anyone calling a GST recession.

Don’t forget the farm sector

Don’t get me wrong, Shane Oliver is one of my go-to economists and I generally don’t take issue with his calls, but economics is not all facts and numbers — there’s conjecture and arguments. As I hinted earlier — we’re a lot more ‘exciting’ than most people think!

When I saw news outlets run with his recession call — newsrooms love a negative call — I suspected where he was coming from. And when I heard his actual sound bite on television, he was quite clear saying on a “non-farm GDP basis we are in recession”.

That means if you are happy to change the definition of recession and leave the farming sector out of the calculations, then you can call a recession. In the wonderful world of economics there are other definitions of recession, but there’s one official one and I think it’s counter-productive for confidence to change definitions.

As CommSec’s hotshot economist, Craig James pointed out: “It’s a slowdown, but not a recession.” I wonder how many recessions we might have had if we had not counted the very important farm sector? I’m not saying it’s wrong to look at other definitions of recessions, but it’s not appropriate to change definitions if it spooks people more than it needs to.

Look at Australia

Economies and stock markets run on confidence and going negative too early has little value when the Federal Government is responding well. If a government is reacting too slowly, there could be value in economists going negative to prompt action and a better policy response.

By the way, if you want to change the definition, why not redefine Australia. If we take out Queensland (up 0.5 per cent), WA (up 0.6 per cent) and Victoria (up 1.2 per cent), which all actually grew in the December quarter, then the recession picture actually blackens even more.

Negativity in perspective

Drilling down more for businesses and employees who might be a bit nervous — eight out of 17 industry sectors actually grew in the quarter. Agriculture, forestry and fishing were up 10.4 per cent, communication services rose 1.6 per cent but manufacturing, wholesaling and property and business services went backwards.

But let’s keep this negative news in perspective. The December quarter was one of the scariest of all times with the financial system going to the brink. Newspapers, radio and television went mad covering a massive story and many companies, especially overseas-owned ones cut back. The US giant, GE, basically withdrew from many finance areas and sold Wizard Home Loans.

I think plenty of companies went cautious, reducing orders, staff numbers and production. This showed up in the economic growth numbers with inventories running down.

This means businesses reduced production and ran down their stocks and this brings the country’s total production or Gross Domestic Product (GDP) down.

Results without discrepancy

Also the fear factor increased the savings rate of Aussies and this brought consumption down and this did not help the GDP figure. But wait, there’s more.

Those who use numbers to calculate the health of the economy know there’s a bit of guessing and estimating in the final figure, so they throw in a statistical discrepancy amount.

If you want to play around with recession definitions, without the statistical discrepancy there wouldn’t have been a negative result!

“By convention the Bureau of Statistics focuses on the spending measures, but this time around the error term or statistical discrepancy is extremely large,” Craig James said. “That is, negative $1382 million - the largest negative result, or drag on GDP growth, in 15 years. The statistical discrepancy was one of the biggest negative influences on GDP growth in the December quarter, subtracting 0.5 percentage points from bottom-line growth.”

The next report

The March quarter (which will be reported in June) could bring the bad news of an official recession, but it could also be a small positive, so I reckon you should wait and refrain from recession calls until you actually see it.

Good call

By the way, while I don’t like Oliver’s recession call, I do love his 4,500-prediction for the S&P/ASX 200 call for year’s end. If you get this right Shane, then all is forgiven!

Published on: Friday, March 06, 2009

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