Tuesday, June 2, 2009

What Recession?

Some people are starting to ask “What recession?” And it’s not surprising given the surprising amount of good news in recent weeks. Last month is was the surprise fall in unemployment and the healthy increase in retail sales figures or March. Yesterday the April retail figures showed continued growth. Today, the international trade figures have shown a surprise fall in the current account deficit. The share market has kicked into overdrive in the past few days, showing an increase in value of about 15% since its low point in February, and is today at its highest level for the year. The Australian dollar has suddenly gained value and is now above 80 U. S. cents. New home sales are increasing, and although there are mixed reports about property prices, affordability has also improved. So, what’s going on? Is it the beginning of the end of the gloom, or is it a false dawn, an Indian summer, before the really bad news hits home?

Tomorrow, we will finally get the answer to one of the fundamental questions when the national accounts figures are released. Are we or are we not in an “official” recession? Following the negative growth figure for the December quarter, anything below zero will mean that the answer is “yes”. But despite many observers, including the governor of the Reserve Bank, already having conceded that a recession is occurring, is it possible that all of this unexpected good news might continue with a Gross Domestic Product figure that is actually above zero? Well, actually, it might. But at the same time, it really doesn’t matter a great deal. Either way, the global economic recession is still going on, causing great displacement in the major world economies, which will still poses challenges for Australia in the years ahead.

It is possible that a positive figure could be recorded for the March quarter, before a further decline in the following quarter, and so on, giving an overall decline in the economy over the year without actually registering two consecutive quarters in the red. It would still be a recession in overall trend terms, even if it isn’t actually called a recession. On the other hand, if there is no further decline in coming quarters then this current burst of positive news really would be the turning point, and the first indicator of recovery. But if you believe that, then perhaps you haven’t been paying attention to the bigger picture.

While there is good reason to believe that Australia will continue to avoid the worst of the fallout from the Global Financial Crisis, there will continue to be fallout. Much of the current good news comes courtesy of the government’s economic stimulus policies which have played a critical role in not just boosting economic activity, but also boosting confidence. But there is no shortage of dark clouds on the horizon, including the expectation of worsening unemployment, which in turn begins to undermine all other areas of economic activity, especially both retail and property.

As for the sharemarket, surely recent history should tell us that there is still a strong possibility of further volatility in the market for a while yet. The market seems to be super sensitive, responding positively to the new sense of optimism that some are detecting. But I believe it will be just as sensitive to bad news, so it would be appropriate to attach some caution to the optimism. The recession hasn’t been cancelled, it’s just been held back by a combination of good policy and a little good fortune. Whether that will still be the case after the current burst of positive news runs out, remains to be seen.

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