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The (Really) Lucky Country: Talk of recession as Australia takes world record

Past federal treasurers from both sides of politics have praised the economic growth miracle that will see Australia move to the top of the league table next week, cementing its reputation as the world's most blessed economy.

And the achievement has even prompted a degree of political bipartisanship, with the former foes acknowledging each other's economic policy contributions.

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The unknown recession

Australia may have enjoyed more than 25 years without a recession, but as Peter Martin explains, it's been a close run thing.

Official figures to be released on Wednesday are expected to show Australia has clocked up 103 consecutive quarters without a recession – an improvement on the record set by the Netherlands in the 26 years leading up to the global financial crisis. Continued growth over the following days will allow Australia to claim the mantle of the world's most resilient economy.

But that is not guaranteed, with speculation growth in the next set of national accounts could dip into negative territory, and that the subsequent quarter may also be dragged lower as the economic effects of Cyclone Debbie wash through the system.

A recession is usually defined as two consecutive quarters of negative economic growth. 

The Wall Street Journal has hailed Australia's "miracle economy", noting that when Australia's record run began the first Gulf War had just ended, Boris Yeltsin was Russia's new president and Vanilla Ice was big on the charts.

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In that same period, the United States has had two recessions: the so-called "tech-wreck" dot-com bust of 2001 and the global financial crisis of 2008-09. Much of East Asia went into recession during the Asian financial crisis in the late 1990s. Japan has has been in recession six times in the past 30 years.

Australia's world-leading position is the result of hard decisions made in the 1980s, 1990s and 2000s, including floating the dollar, decentralised wage fixing, independence for the Reserve Bank, and the dismantling of high import tariffs.

Then there's the luck of natural resources fuelling an unprecedented China-boom.

There has also been deft management of financial crises – circumstances for which the Treasury and the Reserve Bank of Australia war-gamed ahead of the GFC.

A succession of Australian treasurers played a role in the story. Speaking from the Netherlands, Paul Keating told Fairfax Media the building blocks of today's prosperity came from the fundamental reform decisions of the Hawke government as early as 1983.

"By the late 1970s, Australia had become, virtually, a Jurassic Park in economic terms, living behind a high tariff wall," he said.

"There was no orthodoxy in existence at the entry into the Hawke government to address national problems … the changes made to Australia were made by the cabinet itself, none of the new economic or social framework popped out of some Treasury or Prime Minister and Cabinet printer."

Peter Costello, who would later introduce the GST and the Future Fund, having steered the country around two downturns, agreed those early 1980s changes were important and said the sustained growth period was the sum of difficult reform followed by careful stewardship.

Each acknowledged the value of past reforms, with Joe Hockey observing that changes under Mr Keating, and Mr Costello, had set the scene.

"They were very important but the reform did not stop, contrary to perceptions ... each budget builds on the foundations of earlier budgets," Mr Hockey said from Washington DC.

Wayne Swan said the secret was "platforms of growth", which had delivered a better mix of capital and labour via "a progressive tax system, a decent social security safety net, good spending on quality health and education and a decent retirement system."

"The mixture of those things is what actually is behind Australia's 26 years and for that 26 years, it's basically roughly Liberals and Labor in power equally, certainly since the 1970s," he said.

But gross domestic product, the sum of everything that is earned, spent and produced in the economy, is harder to measure than is appreciated.

So much so that the Australian Bureau of Statistics keeps revising past measurements so that previous recessions and even previous spectacular growth get revised away.

When Mr Keating fatefully declared in November 1990 that "the national accounts show that Australia is in a recession – the most important thing about that is this is a recession Australia had to have" he jumped the gun. That was what the accounts showed at the time, but they don't show it now.

Subsequent revisions show GDP slipped in only one of the two quarters in question – the September quarter of 1990 rather than both the March and September quarters.

What we now call the early 1990s recession turns out to have happened later, in 1991. Australia also had a brief recession after the introduction of the GST in 2000, although it didn't know it at the time.

Terry Rawnsley of SGS Economics and Planning, who used to compile the national accounts in the ABS, said big revisions take place up to six years after a number is published. The bureau estimates the sales of products such as haircuts only every five of six years, using a household expenditure survey. In between times it adjusts its estimate of spending on only for increases in population and prices until the next household expenditure survey when it readjusts a half decade's worth of history. It readjusts its seasonally-adjusted measure of GDP much further back every time it re-estimates seasonal patterns.

It means previously-unknown 'recessions' can pop into existence years down the track and then disappear as quickly as they appeared a few quarters later.

The nation was told then that GDP grew 0.4 per cent in the September quarter and slipped 0.6 per cent in the December quarter. But over time the growth of 0.4 per cent was whittled down to 0.1 per cent, and then a tiny positive which rounded to 0.0. Then it went negative. By March 2011, the September quarter of 2000 had gone backwards (by only $25 million) giving Australia two consecutive quarters of negative growth. But the 'recession' was soon revised away again. Today we are told the economy grew slightly in the September quarter leaving Australia recession-free.

Former Reserve Bank governor Glenn Stevens thinks Australia did go into recession during 2000 and he thinks it also went into recession during the global financial crisis.

"I think it is a mistake for us to keep telling this story of so many years with no recession," he told a business audience in 2014. "I don't actually think it is accurate for a start."

"But for the vagaries of quarterly national accounting we might well have called the end of 2000 a recession. We would have called the end of 2008 one, in fact I would call it that."

The Australian treasury certainly expected a recession during the global financial crisis. For what may be the only time in it's history, it actually forecast a recession, in the 2009 budget. But instead of shrinking 0.5 per cent over 2009-10 as forecast, the economy bounced back 2.1 per cent. At times retail spending accounts for half the change in GDP. Two cash giveaways, the first of $10.4 billion, and the second of $10.4 billion, forced retail spending back up. The Reserve Bank reinforced the bounceback by cutting its cash rates from 7.25 per cent to 3 per cent.

But there are many who believe that, using a common sense definition, Australia did indeed go into recession in 2008, and some who believe it we are still in it.

Bob Gregory is one of Australia's leading labour market economists and a former member of the Reserve bank board. "I look at the number of people employed full-time as a proportion of the population," he says. "The immediate drop at the start of the GFC was weak, but then it started to go slide at a fairly continuous rate. By now its comparable with the drop in full-time employment during the early 1990s recession, except that it's been continuing."

Professor Gregory says other markers of a recession include a sharp drop in wage growth and a steady climb in underemployment; the measure of workers employed for fewer hours than they want.

"I think in a way the treasury agrees with me," he says. "They are forecasting a sharp rebound in wage growth of the type you would expect after a recession."

Treasurer Scott Morrison this week started preparing the ground for weak or negative growth for the March quarter, making it the second quarter in the last three the economy has gone backwards.

Bank economists are forecasting barely positive or negative growth.

The May budget forecast a lift in economic growth from 1.75 per cent in 2016-17 to 2.75 per cent in 2017-18 to 3 per cent in 2018-19.

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