Recessions and Depressions

Identification of Recessions
Economists identify recessions by studying economic indicators. The most commonly used test for a recession in countries without an official recession dating body is negative real GDP growth for two consecutive quarters. However, this is approach is criticised by economists such as Claessens and Kose of the IMFs Research Department for being narrow as it focuses only on levels of GDP.(Claessens & Kose, 2009) They argue that a truer understanding of the state of an economy can be obtained if other indicators are also used. In introducing some such indicators, Claessens and Kose quote the USs National Bureau of Economic Researchs (NBER) Business Cycle Dating Committees (BCDC) official definition of a recession which highlight characteristics such as a significant decline in economic activity, lower levels of employment and real income. Other indicators examined include lower levels of retail sales, industrial production, housing values and investment. Typical recessions are noted to last about a year and result in a 2% decline in real GDP. The fall in consumption level is usually much smaller than the fall in industrial production and investment. During recessions, inflationary pressures dissipate due to lower spending levels. Of particular note is that the BCDCs definition does not abide by the

two consecutive quarters rule. This non-compliance is seen in the BCDC s recognition of the USs economic downturn in 2001 as a recession despite there not being two consecutive quarters of real GDP decline. A less cluttered definition of a recession is offered by Eslake as a lengthy period of below potential real economic growth.(Eslake,2009) In order to quantify below trend growth Eslake submits that a recession occurs when the unemployment rate rises over 1.5% over the past 12 months. This criterion accurately correlates the official recessions experienced by both the US and Australia (in 1961, 1974-1975, 1982-1983 and 1990-1991) in the past 50 years.

Differentiation of Recessions & Depressions

The most common method of distinguishing depressions from recessions is that depressions are longer in time period and deeper in impact. One prevalent definition for a depression is a decline in real GDP in excess of 10% over 3-4 years. This is consistent with the USs experience of the Great Depression; a 30% decline in real GDP occurred over a four year period. Eslake puts forward that the length and depth of impact are not the only differentiating characteristics of a depression. Two others are deflation and reduced access to credit. For example, during the USs Great

Depression of the 1930s asset prices, bank lending plummeted and deflation of 27 % occurred between October 1929 and May 1933 Periods of Recession for the United States & Australia [12/1959-12/2010] The table below shows periods of recession experienced by the USA and Australia according to the rule of thumb

Australia

USA

4th

Qtr 1960 3rd

Qtr 1961

1st Qtr 1969 2nd Qtr 1969

3rd Qtr 1971- 1st Qtr 1972

3rd Qtr 1974 1st Qtr 1975

2nd Qtr 1975 4th Qtr 1975

2nd Qtr 1980 3rd Qtr 1980

2nd Qtr 1977- 4th Qtr 1977

4th Qtr 1981 1st Qtr 1982

3rd Qtr 1981 1st Qtr 1982

4th Qtr 1990 1st Qtr 1991

2nd Qtr 1982 2nd Qtr 1983

4th Qtr 2008 2nd Qtr 2009

4th

Qtr 1990 2nd Qtr 1991

Australia did not suffer a recession from the Great Financial Crisis according to the rule of thumb. There was only one quarter of negative real GDP growth (4th Qtr 2008)

Correlation of Recessions
There is a strong historical correlation in the timing of recessions for both countries. The mid 1970s, early 1980s and 1990s were periods of recessions. The underlying causes of this correlation can be attributed to the phenomena of globalisation as events traditionally affecting only one country now have carry over effects all around the world. The oil crisis of the 1970s resulted in high levels of inflation for all developed economies as increased oil prices meant increased transport costs which are reflected in the price levels of all goods and services. In response to high inflation, interest rate rises were implemented by respective monetary authorities, which cut spending, and hence economic growth. Monetary policy lag meant that the consumption curbing effects of interest rate rises were still felt in the early 1980s. The Iranian revolution temporarily increased oil prices and the restructure of the financial system during this period both contributed to slow growth. The 1990 oil price shock as well as an accumulation of debt from the 1980s caused another recession in 1991. However, the GFC did not lead to a recession in Australia despite causing

the USA to experience one between the 4th quarter of 2008 and the 2nd quarter of 2009. It did lead to one quarter of negative growth. It is therefore clear that the saying Australia catches a cold when the US sneezes does have a ring of truth. Word Count 758

References
Claessens Stign and M. Ayhan Kose, What is a recession? Finance and

Development, March 2009.

Eslake, Saul, The difference between a recession and a depression,

Economic Papers, 28(2), 2009, 75-81.