Following last week’s Q1 National Accounts, I cheekily suggested that the domestic economy was in recession. Many of my peers also made the same observation — with more or less degrees of seriousness.
Along this line, some focused on Western Australia, which had been the heart of the domestic demand boom, and where things had clearly changed (annual growth in WA’s domestic demand had slowed from ~15% to 0% over the past year). Mark the Graph has just posted a very careful analysis that looks at this question — and comes to a worrying conclusion.
I had been reasonably sceptical about the prospects of a GDP recession (two quarters of declining GDP), but Mark’s analysis has made me more open minded.
I had simply assumed that the third phase of the mining boom (the one we are entering) would be characterised by fewer capital goods imports and lots more exports — which means net exports would hold up GDP and keep Australia well-clear of an output contraction. The speed of WA’s decline calls that into question — can we grow exports that quickly?
What always seemed likely to me was that there would be a material increase in unemployment, as the investment phase matured into a net-export boom. This seemed very likely, as the investment phase of these mining projects is much more labour intensive than the production phase.
On this point, Mark finds that WA has already satisfied an alternate (better) definition of recession — a 150bps increase in the unemployment rate (i have reproduced his chart, above). in SA terms, the unemployment rate is 170bps higher in only 10 months.
Of course, we are not quite there yet in trend terms — but come Thursday’s jobs report, it is very possible that the WA unemployment rate will have risen further and this will pull the trend estimate higher. So come Thursday mid-day, it may well be reasonable to declare recession in WA.
I continue to expect the RBA to cut 25bps in July and retain their easing bias — their demand test has clearly been met.