It has been so long since Australia’s last recession – 28 years, in fact – which means that some people are getting very blasé about how bad a recession could be.
If Australia is already slowing down, why not bring on the recession and get it over and done with, the reasoning seems to go.
After all, with growth now the lowest in 10 years at just 1.4% and per capita GDP growth already negative, maybe we should embrace the downward trend as inevitable.
Perhaps the recession would make things a lot better, making houses more affordable and improving the prices of many consumer goods.
Well, this is a classic case of being careful what you wish for because a recession is not something that you want to experience if you can avoid it and the effects of a recession can be very long lasting and unpleasant.
Indeed, Australian Prime Minister Scott Morrison would be well advised to do whatever he can to avoid Australia slipping into two consecutive quarters of negative growth – the classic definition of a recession – to ensure the government’s own finances remain in good shape and to improve his chances of being elected again.
Here are just some of the reasons why you don’t want to join the chorus of people who now seem to be cheering the prospect of an Australian recession.
Hard to buy a house when you don’t have a job
One of the first casualties of a recession is usually the jobs market, so if you think things are tough right now, just wait until the unemployment rate flies upwards.
It’s is not just the unlucky people who lose their jobs that get hit in the neck by rapidly rising unemployment – wage rises tend to disappear entirely the moment a queue of qualified people appear outside the door who are happy to accept a job on lower pay.
Higher unemployment is bad news in many other ways.
It increases government payments for the dole and other income support measures and reduces income tax, acting like a pincer movement on the Federal Budget.
Those extra hundreds of thousands of people looking for work don’t just simply report back to their office or factory when the recession is over.
While unemployment usually rises very quickly in a recession, it tends to only fall slowly over a long period of time, leaving a lot of human suffering in its wake long after the recession is officially over and economic growth has resumed.
It is not just the wealth of individuals and families that is permanently set back by a recession – the entire community suffers because growth usually resumes at a lower pace.
So the period of negative growth is usually followed by a lower growth rate for a long time, meaning that the economy will never really catch up on the lost months or years of a recession.
That is why it was so beneficial for Australia when we just dodged a recession in 2008-2009 during the GFC because it meant that our economic growth rate per person remained permanently higher than countries that fell into recession such as the US and UK.
Government gets hit hard
As mentioned, the nasty squeeze on government revenues caused by paying out more unemployment benefits and other income support while income taxes fall but there is a more generalised recession malaise that hits governments hard as well.
When the jobs market sours, many people are literally forced to retire not at a time of their choosing and with perhaps not as much retirement savings as they had hoped, increasing the chances they will also be forced to lean on government payments to survive.
Similarly, other taxes such as the GST, stamp duty and a wide range of taxes on consumer goods such as cars will simply not be collected at the same level due to lower sales.
Governments with less money – both at the state and federal level – need to reduce spending or increase debt or both and that will impinge on their ability to invest in new infrastructure and other projects that provide employment and will reduce their budget flexibility for many years to come.
How do we avoid a recession?
So, if you put yourself in Scott Morrison’s shoes for a minute, what can he do to prevent Australia from falling into a recession – given that our growth rate is rapidly slowing and it would not take much for us to tip over the edge?
Well the key word here is stimulus.
In essence, stimulus is a little bit of a con game which involves pumping extra money into consumer’s pockets so that they temporarily think they are richer than they really are and have the confidence to keep spending and investing.
One way of doing that is to cut interest rates, which the Reserve Bank has been doing with two cuts in a row but there is limited scope left for that now that rates are at 1%.
There are plenty of central bank tricks the RBA could try including Quantitative Easing, negative interest rates, a big bond buying program and a few others but there are negative problems with relying too much on interest rates as a stimulus tool.
We are already seeing some of those problems with real estate prices taking off again after a short lull as lower interest rates embolden buyers to tackle ever bigger mortgages.
Other asset bubbles can also inflate if interest rates are too low for too long.
Lower interest rates are also a two-edged sword – helping borrowers but hitting savers hard and cutting their income.
Time to splash the cash?
The other main trick is for governments to put cash directly in the hands of people so that they can spend it and keep the economy growing.
We have already seen this back in 2009 when former Australian Prime Minister Kevin Rudd spent up big on school halls, pink batts and $900 grants as far as the eye could see.
It may not have always led to great results but it was certainly effective at jolting Australia back on to a growth path – together with the positive effects of China’s stimulus program on our mining exports.
Scott Morrison has already tried some modest stimulus with the $1,080 tax refund which is now flowing through as people lodge their tax returns.
So far, that doesn’t seem to have cut the mustard so he will need to consider some other ways to get some cash into people’s hands to ensure a recession is avoided.
It may be painful walking back on promises such as producing a budget surplus or being reminded of your negative comments about the Kevin Rudd “cash splash’’ but in the longer term the benefits of avoiding a recession are much higher than the problems that accompany one.