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Is the Australian economy heading for a recession?
Gerard Jackson
It’s not that our job figures cannot be trusted: it’s just that most economic commentators do not know what to make of them. The problem is one of aggregates. Our economic commentariat knows there are troubling undercurrents in the Australian economy that are making themselves felt. It just does not know how to square them with the employment figures.
Assuming the statistics are accurate and the Australian economy did create 200,000 jobs during the past six months, what does this tell us about the direction of the economy? Absolutely nothing is the answer.
To get a better feel of how the economy might be doing let us take a look at the US economy in December 2000. Unemployment was stood at 4 per cent and most economic commentators were piling praise on the Clinton administration.
On closer examination, mainly from the vantage point of hindsight, most economists now accept that the economy was sliding into recession. The growth in GDP for the year was only 0.8 per cent, even though the demand for labour seemed buoyant.
Even more striking, at least to those who bothered to look at the data, was the situation in manufacturing where unemployment was still rising after peaking in 1998 at 17,637,000 from which it fell to 17,331,000 in July 2000. Manufacturing had found itself in a cost-price squeeze, forcing it to fire workers. The more astute recognised the danger. This is one of the reasons why early as 1999 I was writing that the US economy was going into recession.
The economic data completely foxed our orthodox commentators. How could manufacturing be in recession while the demand for labour rose along with real incomes? Simple. What they were witnessing was a classic boom-and-bust situation, one well known to classical economists. This fact was accepted by Marx pointed out “that crises are precisely always preceded by a period in which wages rise generally (italics added) …”
So where does this leave the Australian economy? According to the Australian Industry Group -- PricewaterhouseCoopers the PMI (performance manufacturing index) was down to 52.6 in March, “well below the peak of late 2004 and down on the 55.4 recorded at the same time last year”. Production for March was 55.5 against 61.1 for March 2004.
What I found particularly interesting is that fabricated metals, basic metals, machinery and equipment are all down on February while unemployment rose in the miscellaneous manufacturing sectors. We then find that “cost pressures strengthened for the second successive month in March, rising by 4.4 points to an unadjusted 77.9 — the largest monthly rise since June 2004”, with “cost rises … strongest in basic metals” sector.
Something else that should be carefully noted is that from January 2004 to January 2005 M1 grew by only 1.5 per cent and bank deposits by 2.6 per cent.
All of these statistics point to the eventual emergence of a classic recession. Trying to get this dismal fact across to our politicians, especially conservatives, seems to be an impossible task.
See the Tyranny of aggregates
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 11 April 2005