Recession - A mind game?

The idea of a recession in Australia has gained momentum in recent weeks. The critical question is: "Are we there yet?"

There are two answers. Technically, no. Psychologically, perhaps yes.

What is a recession?

Essentially, a recession is a period of reduced economic activity. Key factors that are considered include a drop in GDP growth, a decrease in personal income, a rise in unemployment, and a dip in industrial production and retail sales - all over a sustained period of time.

Are we there yet?

Technically, Australia has not entered into a recession - yet. And many optimistic commentators hold the view that Australia is in a good position (as compared with other nations) to ride out this financial ship wreck without entering into a technical recession.

The mind game

Then why is prospect of a recession at the forefront of our minds? Why is it splashed all over the media - as if we are already there?

This raises the following issue: Is Australia in fact talking itself into a recession in the face of fear and growing pessimism?

I came across an article in The Age today that touched on this point. Glenn Stevens, the Reserve Bank of Australia chief, recently commented that "the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness."

Are our fear-based perspectives driving things in the wrong direction unnecessarily? The recent activity on the share market is a good example of this. The unprecedented gains and losses on a daily basis (a 5-10% movement in one trading day has not been uncommon lately) is a clear sign of emotion-based decisions, as compared to choices based on solid long-term fundamentals.

What does the future hold?

The Howard/Costello government's tight monetary and fiscal policy settings over the last decade will ensure that Australia better able to cope with the current economic climate. However, this will not guarantee that Australia will not enter into a technical recession. Economic data released yesterday suggests that there is a possibility that Australia may follow the world's leading economies into recession in the first six months of 2009.

However, this remains to be seen.

The fact is, we are not currently in a recession. So let's ensure that we do not talk or psych ourselves into one.