Why unemployment is the more reliable gauge when declaring recession
Pandemic aside, Australia hasn't experienced a recession caused by rising interest rates since the early 1990s. Now in the current rate-hiking cycle, RBA governor Michele Bullock concedes the risk of recession remains a possibility.
The Reserve Bank governor, Michele Bullock, dismissed the notion of an imminent recession but acknowledged that failure to control inflation could lead to a situation where interest rates become excessively high. She expressed her reluctance to this outcome. Unlike the post-pandemic era, Australia has not witnessed a recession primarily triggered by rising interest rates since the early 1990s.
The concept of a recession, traditionally defined by two consecutive quarters of economic contraction, is considered flawed. Unemployment statistics offer a more accurate measure of recessions and the disproportionate impact they have on society, particularly on jobless individuals and their dependents. Historically, recessions have often resulted in significant job losses.
The 1980s, a period marked by deregulation and a surge of aggressive entrepreneurship, culminated in the "Decade of Greed." This era ended abruptly with Black Monday in October 1987, when the market plummeted by 22.6 percent in a single day, sending shockwaves through global markets. The Australian economy responded with a severe recession, and unemployment skyrocketed to over 11 percent.
Interestingly, the RBA primarily focused on combating inflation by raising official cash rates to a staggering 17.5 percent, causing a contraction in the economy. Despite the GDP figures confirming the recession, many economists and policymakers argued that it wasn't a recession due to the absence of two consecutive quarters of economic contraction.
The RBA gradually lowered interest rates in 1990, helping the economy recover. The recession officially ended in 1991, but the unemployment rate remained elevated for a decade before returning to pre-recession levels. Fortunately, unemployment is currently at a historically low 4.6 percent, despite the RBA tightening rates to their highest in 15 years.
The economist community has long recognized the importance of maintaining an unemployment rate around 5 percent to keep inflation in check.
Written by urgent.news from ABC News AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
