As GDP stalls and the per capita recession deepens, economic parallels with the early 1990s are eerie

As GDP stalls and the per capita recession deepens, economic parallels with the early 1990s are eerie
  • PublishedJune 8, 2024

The similarities are uncanny.

Both Labor treasurers aged 46, sharply dressed, on the rise with aspirations for the top job.

For Paul Keating, it’s 1990. For Jim Chalmers, 2024.

Both face severe economic downturns sparked by rampant inflation and sharp interest rate increases that have left mortgage borrowers reeling.

In 1990, the Reserve Bank under then-governor Bernie Fraser started cutting the cash rate from a peak of 17.5 per cent.

That was after a two-year period where rates had surged from the already high levels of the 1980s.

“For some time now, monetary and other policies have been directed towards restraining the growth in domestic spending,” Fraser noted in his statement after the bank’s January 1990 meeting.

“To this end, money market interest rates, for example, have risen by over 7 percentage points since the early months of 1988.”

Man in suit sitting in front of a microphone in a radio studio with computers and panels on desk
Paul Keating oversaw mortgage interest rates in the very high teens during his time as treasurer.(Getty/Impressions)

The percentage point rise in rates has been smaller this time around, at 4.25 over 18 months from May 2022 to November 2023, but the rate shock has been bigger for a couple of reasons.

First is that mortgage rates have roughly tripled from lows around 2 per cent to current levels generally well above 6.

Second is that household debts are much bigger now, both in absolute terms and relative to income, so borrowers are paying that increased interest rate on a much larger loan sending their repayments up by more relative to income.

By late 1990, then-treasurer Paul Keating was declaring it “the recession we had to have”.

Thursday morning on RN Breakfast, when asked about recession, Chalmers responded, “we’re not contemplating that outcome here”.

Neither was Keating early in 1990.

Per capita recession worst since the early ’90s

Jim Chalmers speaks at a lecturn with budget 2024-25 on it
Treasurer Jim Chalmers says his latest budget has been designed to support the flagging economy without adding to inflation.(ABC News: Matt Roberts)

On one key measure for households, Australia is already in a deep recession comparable to the early 1990s.

That measure is GDP per capita, or how much economic activity there is per person.

The March quarter National Accounts showed GDP per capita fell 0.4 per cent over the first three months of 2024 and 1.3 per cent over the past year.

With its big migration intake, Australia hasn’t been a stranger to per capita recessions, even over its record-breaking recession-free run between 1991 and the COVID pandemic.

But AMP chief economist Shane Oliver says this is the worst one since the early ’90s.

Even with the boost from record population growth, Australia’s annual headline GDP increase of 1.1 per cent over the past year was the weakest, outside the pandemic shutdown, since the early ’90s.

1990s corporate debt crisis

For all the similarities, there are key differences.

The biggest is the comparatively healthy state of business finances in 2024.

Australian corporate debt is at the lowest level it has been relative to the size of the economy in about a quarter of a century.

The rapid rise in rates over the late 1980s didn’t just put households in trouble, it sent some of Australia’s biggest companies to the wall and many others within a whisker of bankruptcy.

That meant mass job losses.

The unemployment graph from the era is stark.

Unemployment rose long after interest rates started falling

But, even though Australia doesn’t look set for the same scale of corporate collapse this time around, there’s still a worrying cautionary tale from the unemployment graph of the early 1990s.

This time I’ve graphed the cash rate alongside it and marked the point where Australia was in a ‘technical’ recession — the two consecutive quarters of economic contraction, which extended to a third in this case.

As you can see, the recession came after the RBA had already cut interest rates several times, and unemployment peaked fully two years after Keating uttered his infamous and, as it turned out with later data revisions, slightly premature declaration of recession.

What this highlights is the immense lag in monetary policy — a lag that has only increased currently due to the large volume of ultra-cheap fixed mortgages that are still rolling off onto much higher variable rates and the estimated $260 billion in excess savings that households stashed away during the pandemic period.

One of the common refrains of those urging against what they see as premature rate cuts is that the jobs market remains robust.

RBA governor Michele Bullock has repeatedly pointed this out, as recently as in the Senate on Wednesday.

A middle aged woman with a light brown bob and glasses speaks in front of small microphones mounted on a desk.
RBA Governor Michele Bullock at Senate estimates, June 2024.(AAP: Mick Tsikas)

“The labour market has performed very well … we’ve had lots of growth in employment,” she told a Senate committee hearing.

“The unemployment rate is rising gradually, but it’s risen from a low of 3.5 per cent.”

Most recently at 4.1 per cent, it’s still close to the lowest levels in around half a century.

‘Long and variable lags’ in economics and politics

But think back to the graph from the early 1990s, how quickly the jobless rate rose and how almost all of that damage came after the Reserve Bank was cutting interest rates.

While there are good reasons to believe we won’t see an identical pattern this time around — we’re starting from a stronger base of employment and with big companies generally in good financial health — it’s likely that unemployment will again be the last indicator to suffer as the economy slows.

Sliding glass doors into a building with the words Reserve Bank of Australia written above.
The Reserve Bank has been accused of putting up rates too slowly as inflation took off, is it at risk of making a similar error as it comes down?(AAP: Brendan Esposito)

It’s a risk that Bullock is conscious of.

“We generally think about the flow through of monetary policy to take 12 to 18 months in full,” the RBA boss told senators.

“If we think, say, 12 months, there’s maybe another 50 basis points (0.5 percentage points) or so maybe to come through.

“But maybe not, because the standard term here is there’s long and variable lags, and we don’t know.”

Let’s hope we don’t find out in a couple of years that the Reserve Bank has once again been too slow to shift course as economic growth grinds to a halt.

As a political footnote, the Keating comparison isn’t entirely bad for Chalmers.

Around a year after his “recession we had to have” comment, Keating had ousted Bob Hawke as prime minister.

Despite overseeing one of Australia’s sharpest recessions, he went on to defeat Liberal leader John Hewson and his deeply unpopular “Fightback” economic plan in the 1993 election in what Keating described as “the sweetest victory of all”.

But I’m pretty sure Jim Chalmers would prefer a smoother path to power if he ever is to assume the top job.


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