The Recession We Didn’t Have To Have

EDITORIAL FRIDAY 01.08.08 The release of the latest retail sales figures has prompted the newspapers to scream “recession” in the headlines. Retail sales for the month of June fell by 1%. That is a sharp drop, which if sustained represents a devastating figure. It should have come as no great surprise either with warning signs emerging since the beginning of the year. But is it actually a recession?

The technical definition of a recession is two successive quarters of economic contraction, so the technical answer is no. But the technical answer might also be a misleading one. The two quarters from January to June delivered retail revenue growth that was less than inflation. The actual volume of items sold has fallen by 0.3% in the first quarter and 0.6% in the second quarter. So when measured by volume of actual stock, not dollars, the retail sector is already in technical recession. Unless the trend is arrested it will lead to a real recession.

Now it is true that the nation’s economy continues to be powered by the resources boom, but those who do not directly profit from it are finding it hard to keep up. As important as the resources sector is it is the retail sector which is Australia’s largest employer. If retail employees start losing their jobs, it’s the beginning of the collapse of the house of cards. Some observers have suggested that the retail figures do not take into account the tax cuts delivered on the 1st of July, but any battler will tell you that whatever gains were made from those tax cuts had already been spent long ago on increased fuel and housing costs.

While some are calling for an immediate interest rate cut to head off the recession before it happens, that may not be enough. An interest rate cut may well help restore retail sales, but until we conquer the much deeper problems of the housing affordability paradox it will be difficult to revive consumer confidence to the sunny outlook we all started taking for granted.

Ironically, this didn’t have to happen. When the inflation alarm bells started ringing last year there were some who realized that high interest rates were part of the problem, not the solution.