The recession we should have had

Twenty-five years of uninterrupted growth has been a boon for Australia’s economy, but, Stephen Walters asks, has it been at the expense of reform?

Don’t get me wrong – I am not pro-recession. Recessions can be brutal and painful, and destroy economic value. Unemployment rises, output and incomes fall, confidence collapses, and many lives are upended. Most recessions are unhappy, disruptive experiences. Just ask Greek citizens who are experiencing the ninth year of a recession.

But economists now recognise that mild or short-lived recessions can have some upsides, even if these are appreciated only in hindsight. The long-term benefits of deep or extended recessions may be significant, but probably are not worth the near-term hardship. It can be different with less severe downturns.

Indeed, for all their disruption, short-lived recessions can help clean out excesses and modify behaviours that otherwise could have led to worse outcomes. They can be triggers for reform, the sometimes difficult changes neglected during good times. Lessons are learned, and economies often emerge in a stronger position to navigate the ups and downs of the next cycle. As they say, a good crisis should never be wasted.

In 2008-09, for example, when most economies slipped into recession, perhaps we should have moderated the aggressive fiscal stimulus that helped keep us out of recession. That may have contributed to a longer downturn, but our budget position would now be in better shape. Moreover, a short recession then may have forced broader reforms that are now long overdue.

As it is, the last recession Australia experienced was more than two decades ago – Paul Keating’s “recession we had to have”. That infamous and informative quote from Australia’s former treasurer in November 1990 after the national accounts confirmed a recession provides a clue as to where this is heading. Have we since avoided recessions we should have had?

Former treasurer Keating was arguing that without a recession Australians would have carried on oblivious to emerging imbalances. An overheating economy was generating inflation. The resulting spike in interest rates could have triggered an even more abrupt economic adjustment if we had not had the recession the treasurer claimed was for our own good.

There have been several episodes since 1991 when Australia’s output fell – like after the GST was introduced in 2000, at the outset of the GFC in 2008, and after the Queensland floods in 2011 – but not in consecutive quarters. Most economists agree recession occurs only with successive quarters of falling gross domestic product. Only the Netherlands managed to avoid recession for longer than Australia has now, and things have since ended badly for the Dutch. Indeed, it is worth remembering Reserve Bank of Australia Governor Glenn Stevens’ observation back in 2013 that the probability of recession here is 100 per cent – only the timing is uncertain.

It is remarkable that no Australian under 40 has experienced a recession during their working lives. This lack of lived experience of hardship helps to explain the complacency economists argue has become an affliction. It also feeds the perception that the “lucky country” will sail through adversity.

We have ridden a series of serendipitous events that have seen the economy more than double in real terms since that last recession. There were commodity price and mining investment booms, home construction bonanzas and surging demand for our exports, particularly from China. Moreover, we dodged potholes others didn’t, like the worst of the global financial crisis and the “tech-wreck” of the early 2000s.

Ironically, though, this means we now carry into the inevitable downturn, whenever it comes, significant excesses and imbalances. Productivity is low, household debt is among the highest in the world, the cost of doing business here is prohibitive, national income is falling, and house prices are among the world’s highest.

No politician welcomes recession, particularly an extended one, but perhaps it would have been advantageous if, instead of 25 years of unbroken economic sunshine, we’d endured a downturn or two. It’s like suffering the mild discomfort of inoculation occasionally to prevent serious disease later. These may have helped bounce politicians out of the reform inertia of the last decade.