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Issue # 1414      10 June 2009

Never mind the economic spin

The recession is very real

“What we have done today is avoid a technical recession,” a very relieved Prime Minister Kevin Rudd told the media pack following the release of the March quarter gross domestic product (GDP) figures by the Australian Bureau of Statistics (ABS). Australia might not be having a technical recession according to capitalist economists and government officials, but the domestic economy is in a very real recession. The recession is as real as it gets for the people of Australia.

The GDP rose by 0.4 percent in the first three months of 2009, following a contraction of 0.6 percent in the last quarter of 2008, according to the ABS statistics. The “technical” definition of a recession, according to capitalist economists is a contraction of the economy in two successive quarters. So, as far as capitalist economic theory goes, we are not technically in recession.

Reality tells another story. Unemployment is rising, working hours have been slashed, wages are going backwards, corporate profits are in decline, companies have cut production and are winding down an over-supply of stock, business investment has collapsed, bankruptcies are rocketing and retail outlets are holding yet another round of sales. The domestic economy is in recession.

The rise in GDP (a measure of national income) came as a surprise to the PM and his Treasurer Wayne Swan as well as big business and media commentators. They know that on the ground the domestic economy is in recession. So where did this figure reporting economic growth come from? Why were the statistics so much better than expected?

There are a number of reasons for this outcome. The government’s stimulus packages combined with low interest rates have clearly played an important role in holding up consumer demand for goods and services. The recession would have been far deeper without them.

A trade surplus of $2.3 billion contributed 2.2 percentage points to the GDP. The surplus owes a great deal to a decline in imports (lack of demand) and socialist China’s stimulus package. A partial recovery in rural exports, after years of drought conditions also helped make up for the decline in exports of minerals and other commodities. The volume of rural exports increased by around 18 percent but income from them rose by only four percent because of the huge fall in commodity prices on international markets.

So what does the future hold? Will the economy be on the path to recovery next year?

The second stimulus package still has some way to go, with most people receiving their $900 handouts from the government during April and May. To the extent that they are spent, they will increase demand during the second, June quarter of 2009.

The increase in approvals for new housing resulting from the government’s first home-buyers’ grant have still to be realised in terms of jobs and increased demand for building materials. The budget’s stimulus spending on infrastructure on schools, roads, ports, rail and other projects likewise will act as a stimulus. The $6 billion increase in military spending will result in some additional jobs, but could have done much more for people and job creation if redirected to public housing, employing doctors, nurses and teachers, public transport and the renewal energy projects.

Australia still has some way to go before it feels the full impact of the global recession. The government’s measures can only be expected to reduce the severity of the recession which is set to deepen.

Wages fall

Workers’ incomes fell by 1.1 percent in the March quarter, a direct result of wage cuts, shorter working hours and sackings. They look set to shrink even further with predictions that unemployment will continue to increase. The social consequences are felt by working people who lose their jobs, homes, and cannot make ends meet. In narrow economic terms, lower incomes mean workers spend less on goods and services. This means more cuts in production, more sackings, more bankruptcies and job losses, more suffering as workers and their families bare the brunt of the crisis.

At some point, when a balance is reached between what is produced and what people can afford to purchase, recovery can begin. When this occurs, industry will be operating from a smaller base. New investments will be made to increase productivity (output per worker). Employers are determined not to restore wage rates and working conditions to pre-recession levels, and they appear to have the support of the government.

The government’s stimulus packages and job creating infrastructure projects are short-term in nature, to bring about a recovery in private profits. The jobs that are created will be temporary. After that, the intention is to leave it to the “markets” – the corporate sector.

The government will be under considerable pressure from the financial sector and the ratings agencies to wind back its debt and restore budget surpluses as quickly as possible. Massive cuts in public sector jobs, welfare benefits and public services will be on the agenda. The very same economic rationalist (neo-liberal) policies that got us into such a mess will come to the fore again.

The pressure will be on workers and trade unions to suppress wage and other demands. Employers will argue that they cannot afford them, that wage rises will hinder recovery. Already Workplace Relations Minister Julia Gillard has asked the Industrial Relations Commission to hold down the wages of workers in restaurants and cafes during the award restructure process.

Further reductions in workers’ incomes will hamper recovery and bring about further, needless hardship and unemployment. It should not be forgotten, that following the 1981-83 recession it took almost 20 years for unemployment levels to drop to their pre-recession level. There was a rapid recovery in profits at the expense of wage rises and jobs.

Under the social contract between the Hawke Labor government and the Australian Council of Trade Unions in the 1980s-90s, called the Accord, unions restrained wage rises and co-operated with employers to reduce labour costs and restore profitability as quickly as possible. The promise was that increased profits would bring new investments, which in turn would bring jobs. The profit part of the equation was very successful. The investment step saw companies going offshore, carry out takeovers, restructurings, downsizings and investment in new labour-saving technology. The jobs did not materialise as promised.

There is a real danger of history repeating itself if trade unions are not successful in fighting for a rapid recovery in wages and jobs. The choice is between a people-led or profit-led recovery.

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