Amid all the bold predictions that Australia will enter "official recession" this year, here is something you may want to keep in mind: there is no such thing.
Sure, recessions are real enough and we might just be in the middle of one now, but there's nothing official about it. Nowhere is it written in stone or decreed by law what constitutes a recession. In the broadest terms, all the word "recession" means is a period of time in which the economy contracts rather than grows. This is notoriously hard to measure, and all we have to go on is a loose set of rules of thumb, invented by economists after observing previous recessions.
The next time you hear a solemn commentator gloomily predicting Australia is headed for recession, the first question you should ask is: "Under what definition?" Because recessions are in the eye of the beholder.
The most common definition, often referred to as a "technical recession", is when the economy chalks up two consecutive quarters of what economists call "negative growth". Negative growth is really an ugly oxymoron, and what they really mean is no growth at all or a shrinking economy.
Access Economics this week became the latest to join the growing bandwagon of economists predicting Australia is about to undergo such a contraction. Access is tipping that real gross domestic product contracted by 0.1 per cent in the December quarter of last year and will do so by another 0.1 per cent in this March quarter, producing Australia's first "technical recession" since 1991.
Does that really sound like a recession to you? We should count ourselves lucky if we manage to escape this global economic maelstrom by only shrinking about 0.2 per cent over six months.
And consider an alternative scenario, which would not be classified as a recession, such as if the economy shrank 2 per cent in one quarter, grew by 1 per cent the next, and shrank another 2 per cent in the next. Does it make sense that this should not be counted as a recession, but that the shorter, shallower contraction being tipped by Access should?
It is this kind of creative accounting that allowed the NSW Premier, Nathan Rees, to claim with a straight face this week that the state was not in recession, despite a stagnant housing market, sclerotic growth and rising joblessness.
If this all sounds like an overly complex and high falutin' way of figuring out whether we're in a recession, you're right.
A better bellwether - and preferred by other economists, such as the chief economist at ANZ, Saul Eslake - is the jobs market. As Eslake notes: "The man or woman on the street is hard-pressed to know what GDP is, let alone if it is contracting."
But everyone knows if they've got a job or not. Most economists expect the jobless rate to climb from 4.5 per cent to about 6 per cent by the end of this year, satisfying another definition of recession - when the unemployment rate climbs by 1 or 1.5 percentage points or more within 12 months or less.
This is where Rees's defence comes a cropper. The jobless rate in NSW has been rising steadily since February last year, from a generational low of 4.2 per cent, up to 5.2 per cent in December. That's a 1 percentage point rise in unemployment. That's a recession.
Another, more subtle, marker of a recession is when national income contracts. A country's actual income depends both on what the rest of the world is willing to pay for its produce and what it has to pay for imports. In Australia's case, the answer in recent years to these two variables has been clear: a bucketload and not much.
But this all changed in just a matter of months, with the rest of the world no longer willing to pay as much for the commodities we export.
As Chris Richardson from Access Economics puts it: "Our key vulnerability is not the extent to which production in Australia falls across two consecutive quarters (the technical definition of recession). Rather, it will be the collapse in income growth in Australia that will hurt most."
A less subtle way to know if we're in a recession is when the government says we are. In the US, this task is delegated to a committee of seven learned souls from Harvard, Stanford, Berkeley and MIT universities who apply a criteria of "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment, industrial production, and wholesale-retail sales".
The only official pronouncement on recession you're ever likely to get in Australia is from Wayne Swan on the day that national accounts show two consecutive quarters of contraction. Even then, he might be wrong. It was another treasurer who in 1990 famously called a press conference to declare a recession "we had to have", only to find that the numbers were later revised so the "technical" recession did not occur until the first half of 1991.
So while economists and politicians tie themselves up in knots about how to define a recession, here is another rule of thumb you might like to apply: the simplest answer is often the best. If it looks like a recession, walks like a recession and quacks like a recession, chances are it probably is a recession.
Jessica Irvine is the Herald's economics writer. Ross Gittins is on leave.
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