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The recession no one is worried about

·4-min read
People walk in pairs by the harbour in Sydney on an overcast day.
The Australian economy took a hit in the September quarter due to severe lockdowns. (Source: Getty)

The Australian Bureau of Statistics (ABS) has just confirmed Australia has registered its second recession in two years.

The funny thing is that no one really cares.

GDP fell a thumping 1.9 per cent per cent in the September quarter as the lockdowns in New South Wales, Victoria and the ACT drove consumer spending down sharply.

In concert with the more than 330,000 jobs lost in the recent lockdown months, this signals a short, sharp recession.

While the quarterly National Accounts are always fascinating, there wasn’t much in the massive data set, including for GDP, that was all that surprising. Sure, the fall in GDP was a little less than generally forecasts, but the result had a muted impact on financial markets.

And even though the slump in output is, at face value, disconcerting, everyone knows why it happened and that those reasons are rapidly fading from view, notwithstanding the emergence of the Omicron strain of the coronavirus.

All competent economists also know that economic output is charging back in the December quarter and that growth will be strong when those numbers are released in early March 2022.

That momentum in the economy is set to continue into the first half of 2022.

Retail sales surged in October, business investment is set to rise at a stellar pace and the inventory run down that undermined the September quarter GDP will soon be reversed, adding a sizeable chunk to output over the next few quarters.

What’s more, demand for labour from business is frantically strong. Wage pressures are acute in many parts of the private sector and there is little doubt that a bout of solid wages growth is about to be unleashed.

The focus of policy makers and those in financial markets is squarely on the extent of the economic pick-up not just in the next quarter, but through the first half of 2022.

If growth is sufficiently strong to see the unemployment rate trend back to 4.5 per cent or less, with wages growth rapidly accelerating to 3 per cent or more inflation will also lift.

It means the RBA will be revamping its forecasts for the economy and monetary policy. It needs to be alert to inflation risks and that means moving closer to validating market pricing, which has interest rate hikes starting around the middle of 2022 with 150 basis point rate hikes in total priced into the middle of 2023.

The RBA board is meeting next week. No change in policy is expected.

That said, the RBA needs to get a wriggle on and embrace this more upbeat information on the economy and inflation in particular as its updated central case scenario.

Unfortunately, it is likely to wait until its February Statement of Monetary Policy, after the December quarter inflation data, to overhaul its outlook.

It could well be a long two months until the updated hard data on the economy is set to reflect upside growth momentum and lock in expectations for monetary policy to be tightened through 2022.

In a similar way, it is encouraging to see the US Federal Reserve emerging from its cocoon in recent days, acknowledging that the surge in inflation is not transitory and that it will further phase out its bond buying soon. This is a precursor to what will be inevitable interest rate increases in the US.

For now, it is clear to one and all that the recession in the September quarter 2022 has passed.

It was sharp, temporary and well understood, unlike most other recessions over the past 50 or 60 years. And that is a good thing.

Get set for a return to good economic growth, an economy getting close to full employment, wages growth and inflation picking up further and with that, interest rates rising.

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