What is recession?

Australia has been benefiting from an economic boom for so long that we seem to have forgotten the low plateaus of economic downturn and recession. But does economic downturn necessarily mean recession?

The generally accepted definition of recession is a period of negative growth over three successive quarters in an economy. Often tied to gross domestic product or a decline in stock prices, negative growth is also linked to business activity and low employment.

‘Negative growth’ sounds like an oxymoron, but it describes the continual decline of an economy. It seems Australia is safe from recession—whether we ‘have to have’ one or not—because despite rising interest rates and inflation, employment rates are still buoyant and we’re steadily posting positive growth. Economic downturn may mean deceleration, but it doesn’t mean going backwards.

Global Recession
“The only country that’s probably on the brink of a recession is the US. There might be a few smaller ones but they probably won’t affect our markets significantly,” remarks Dr Werner Soontiens, associate professor of international business at Curtin University. “The US seems to have recovered from the subprime housing crisis but that has brought it to a standstill.”

But the subprime mortgage crash, where foreclosed loans to risky borrowers left many lending institutions in the lurch, isn’t the only thing happening in the US. Their reliance on oil has meant that the current oil shortage could trigger something more than a dip.

“I would strongly suspect—and there’s always a condition to this—that even if oil prices were to stabilise, the American economy will remain on the brink of recession for at least another 12 months. If oil prices were to increase, there’s a very significant risk that the American economy will go into deep recession,” says Soontiens. “It’s very much linked to current oil prices, and that is assuming there won’t be another destabilising factor that occurs that no one has seen on the horizon. The loan crisis came as a surprise to most people.”

Even if global recession is unlikely, the decline of a market as big as the US is sure to reverberate around the world. Any country that counts the US as an export market will need to brace themselves for lower sales, says Soontiens. “The follow on effect of negative growth will predominantly affect their consumer goods, primarily because the US is renowned for being a consumer economy.

Consequently, final consumer products being exported or being consumed in the US are likely to experience reduced demand.”

If an economy like China, which earns much of its export revenue from selling finished consumer products, takes a hit from reduced sales in the US, it could further affect countries doing business with them; in others words, almost everyone.

“The reality is that a lot of the component manufacturing that takes place in various markets for final products will have a knock-on effect. Something might be assembled in Spain, but there might be components coming from Taiwan and other components coming from Madagascar,” explains Soontiens.

And of course the length of a potential recession would have an effect. “If you assume that the US goes into recession and the recession is longer than 18 months, then that would lead to a contraction of local markets as well because of the collapse or reduction in exports. Initially it’ll only be exports, but if that is long enough then the contraction will spread to other markets.”