The Great Recession that we dodged

The Great Recession that we dodged

ESSA Writers
InternationalEconomic Recovery
March 28, 2014

Six months living on the other side of the world caused me to realise a lot about life in Australia.

Some of the differences between our island home and the rest of the world are obvious, some are instinctive – but one subtle difference has mostly flown under the radar, with big political and economic consequences.

The recent economic event we call the Global Financial Crisis has been an enormous reshaping force in every economy in the world for more than five years now, driving changes in how we approach and think about economics in academic terms, and in the realities of governments’ policy and fiscal decisions. In Australia, this involved two big stimulus packages under the Rudd government, some financial sector reforms, and a drawn out political battle over deficits, spending and debt levels in the face of unfolding debt problems in Europe and the United States.

There’s just one tiny thing that seems to escape notice – for the rest of the world, it’s not called the Global Financial Crisis anymore. For everyone outside of Australia, the recent rupturing of the global economy is now known by the much more ominous title of ‘the Great Recession’.

Why? Well, the answer is simple. While almost every other developed economy plunged into recurring quarters of negative growth (the technical trigger for the term ‘recession’) in the wake of the initial financial collapse, Australia had just one negative quarter, and has since then continued its incredible run of 22 years of consecutive economic growth.

The United States officially entered recession at the end of 2008, with most other developed countries following, while the International Monetary Fund recorded a global recession – that is, a decline in annual real world GDP – in the year 2009. As a whole, the European Union experienced three periods of technical recession in 2008-09, 2011-12 and 2012-13, with the longest lasting fifteen months, while the G20 was in recession overall for nine months over 2008-09.

This extended, deep and sudden reversal of growth caused huge job losses, forced people out of their homes and exposed fiscally weak nations such as Greece, but much of that escaped notice on our sunny island nation, where unemployment has stayed below six per cent and the prospect of a default on government debt remains a distant and abstract idea.

Indeed, for Australians, the ‘GFC’ label captures our arms length awareness of the whole messy business rather well. Most people know it was a big deal for the world – a ‘crisis’ on a global scale. But what exactly was the crisis? It’s sort of hard to put into words. Something to do with finance – whatever that means – banks, maybe?

By contrast, everybody understands what a recession means, either through past experience or the dire warnings in the media that accompany regular economic news. By virtue of its link to a real numerical event, a recession can be distinctly understood, especially in comparison to an undefined ‘financial crisis’.

Moreover, the spectre of the Great Depression of the 1930s – to which the title of ‘Great Recession’ intentionally alludes – remains visceral. The fact that this much more severe title has not been adopted in Australia speaks volumes about our recent economic experience, and our degree of separation from the rest of the world. While other nations have endured the agony of mass unemployment and strained to find a political path through policies of extreme austerity and enormous bailouts, our most prevalent election issue has been a distinctly middle-class concern with rising cost of living and the effects of small adjustments to the tax and welfare codes.

Indeed, some of the biggest effects of the crisis on Australia have been the outcome of our relative economic strength – not least the rises in our currency’s value as traders have sought safe haven from failing economies overseas. While this has caused its own headaches (especially in the manufacturing industry, where serious job losses have resulted from low exports), it is rather ironically our economic success that takes much of the blame.

The reasons for Australia’s escape from the worst of the crisis are many. Nobel prize winning economist Joseph Stiglitz has praised the then government’s stimulus package as “the best designed stimulus package of any of the…advanced industrial countries”. Others have pointed to the strength of our mining sector, with resource demand from China remaining high amidst the chaos, while others still would point to the surpluses delivered under the Howard government as a contributing factor.

In his book ‘The Australia Moment’, George Megalogenis suggests the truth is much more complicated, with Australia’s success deriving from a long history of careful liberalising reform under Hawke and Keating, valuable institutional knowledge retained from past recessions and good decision making in the early days of trouble in 2008.

Regardless of where credit lies, the fact remains that Australia has had a very different economic experience to the rest of the world in the last five years. While storms have raged overseas, only the ripples of change and the whispers of much stronger winds have reached our shores. It has left the Australian public with a view of the national economy profoundly out of context, the political ramifications of which became evident in 2010 and 2013.

Correcting this public view will take a long time, but the language we use around our economic history might be a good place to start. So from now on, let’s ditch ‘Global Financial Crisis’ in favour of ‘the Great Recession (that we dodged)’. It’s a lot more accurate, and it might just help us all to understand our economy a little bit better.