Australia’s recession in perspective

The fact that Australia's recession will be smaller and shorter than the rest of the world is due to our better starting position and our relatively strong trade performance.

A few weeks ago I suggested that we should be relatively optimistic about the Australian economy. Given the national accounts yesterday showed that the economy grew by 0.4% in the last quarter, I could take this opportunity to gloat. But before we pop the champagne, it is worth putting this latest information into perspective.

The first thing that needs to be stressed is that Australia did experience a "per-person recession". Population growth is about 0.4% per quarter and the last four quarterly GDP growth figures have been 0.3%, 0.2%, -0.6%, 0.4%… so while the country may be producing more as a whole, each person is producing less.

Also, it should be remembered that GDP measures how much we produce, not how much we consume. National expenditure actually decreased by 1% in the March quarter, so we also have a "spending recession".

The reason that GDP grew in the March quarter was international trade.

Australia was already outperforming most other countries in trade. In the December quarter, while export volumes dropped by 14% in Japan, 6.5% in the USA and 4% in the UK, they declined by less than 1% in Australia.

And in the March quarter our strong trading performance continued, with exports increasing by 2.7% while imports declined by 7%. The fact that Australia's recession will be smaller and shorter than the rest of the world is due to our better starting position and our relatively strong trade performance.

It is not because of government policy.

True, the government handouts have given a temporary boost to consumer spending. In the March 2009 quarter household consumption grew by 0.6%. Without the handouts this would probably have been lower. But this benefit is temporary and marginally important at best.

The driver of long-run economic growth and employment is private business investment, and that has declined this quarter by 6.1%.

While the government will be quick to take the credit for the 0.6% household consumption number, they will be slower to accept the blame for the -6.1% business investment number. It is true that business investment would have been negative irrespective of government policy. However, there are reasons to believe that activist fiscal policy (ie the stimulus package) harms business investment, both due to crowding-out and by increasing the political risk premium.

But I'm still an optimist. While the government may delay private investment through their policy mistakes, they cannot stop it rebounding eventually. Touch wood.

John Humphreys is a Research Fellow in the economics program at Centre for Independent Studies (CIS).