Er, what is a recession anyway?

How to read the news we'll get at 11.30 am:

Tim Colebatch helps:

Recession: an imprecise term given to a sharp slowdown in the rate of economic growth or a modest decline in economic activity, as distinct from a depression which is a more severe and prolonged downturn. The Penguin Dictionary of Economics

"THEY'VE started already. On the radio, in the papers, on televison, they're telling us tomorrow's national accounts are likely to show Australia is now "officially" in recession, or at least, in "technical recession".

Well, here's a scoop. Tomorrow's national accounts will not declare the economy officially in recession. They won't even say it's in technical recession.

I'm sure of that, not because I know what the figures will say, but because I know what they won't say...

They will not show the economy to be officially in recession for one good reason: there is no official definition of a recession.

Nor will it be in "technical recession". There is no technical definition either.

Recessions deliver as much economic trauma as you and I are ever likely to see, but economists have no agreed definition of what they are. Even the eight-volume, 7680-page New Palgrave Dictionary of Economics does not define a recession.

Wait on, you say, I know what a recession is! A country is in recession if it has two consecutive quarters of negative growth. Isn't that the definition of a recession?

No, it isn't. I can't think of any economist who endorses it. As ANZ chief economist Saul Eslake has put it, it's a silly definition — and Eslake chose that adjective only because he's a polite bloke.

I don't know where the two-consecutive-quarters definition came from. Wikipedia attributes it to an article in The New York Times in 1975 by one Julius Shiskin, who suggested it as one of the signs of a recession. My guess is that it became the "official definition" because the media want to have some simple measure that everyone can see.

But this one doesn't work. I'll tell you why.

. First, quarterly measures of growth are notoriously bumpy. Take the recession of 1974-75, the one under the Whitlam government, when the long postwar boom finally ended, and unemployment soared from 2 per cent to 5 per cent.

In 1974, seasonally adjusted GDP rose by just 0.1 per cent in March, crashed by 2.9 per cent in June, rebounded a bit in September, then fell again in December. Unemployment shot up from 2.1 per cent to 5.4 per cent in nine months, yet on this definition, there was no recession: the falls in GDP were not consecutive.

Then in 1975, when the Government's stimulus kicked in in the June quarter, GDP jumped a phenomenal 3.2 per cent in one hit. Not surprisingly, it then slipped back in the next two quarters. Bingo! On the silly definition, the 1974-75 recession finally began in late 1975, as the economy was picking itself up!

A second example: Korea today. One of the world's most successful economies, South Korea slowed to a crawl in mid-2008 as export markets collapsed. Then came the market crash in September/October, and Korea crashed too. In the December quarter its output plunged 5.1 per cent (Koreans never do things by halves). That was followed by a "dead cat bounce" in March of 0.1 per cent growth. So if you believe the silly definition, Korea is not in recession, because it's had only one quarter of negative growth.

. Second, the real bottom line for the economy is not GDP, but GDP per head. Suppose two countries have GDP growing at 2 per cent, but one has zero population growth, while the other's population is growing by 4 per cent. If both grow at the same pace, then one country is getting richer, but the other is getting poorer. The two-quarters definition doesn't recognise any difference.

So what should we use? Saul Eslake says the best single measure is unemployment. If the unemployment rate rises by 1.5 percentage points within a year, then we're in recession. For 2008-09, on that rule, we went into recession in March, slipped out again in April, but are likely to return to recession in May.

That is better, but it would be better to use a range of indicators. That's what they do in the US, where the National Bureau of Economic Research chooses a panel of widely respected macroeconomists to decide when the country is in recession, and when it has emerged from it.

Their definition is a broad one: "A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators."

They focus on employment and GDP measures equally, and other economy-wide measures. It's an exercise in professional judgement, not the automatic application of a single rule. And in their judgement, the US economy peaked in December 2007 and went into recession in January 2008.

The Melbourne Institute also uses a variety of measures to estimate when the economy is going forwards or backwards. Right now, somewhat surprisingly, its measures shows Australia still growing slowly in March. But the project's director, Professor Guay Lim, says tomorrow's figures could change that.

I say let common sense rule. GDP per head has been falling since March last year. Unemployment also hit bottom at that time, and since then it has risen by roughly 175,000. That tells us the economy has been going backwards, receding, in recession, for a year or more.

The really interesting questions are why it went into recession so long ago — and what is the best way out of it."