Gloom gauge hits record high
The Reserve Bank Governor says that Australia at risk of talking itself into a recession. How accurate is that risk? We revisit our CommSec Gloom Gauge.
The CommSec Gloom Gauge has found that the word “recession” has been mentioned over 2700 times in Australian newspapers in the current quarter – a record high by a significant margin.
The CommSec Gloom Gauge
In July 2004 CommSec devised what we called at the time an “Optimism Gauge” for Australia – an index that measures the number of times the word “recession” is mentioned in capital city newspapers. Recently “The Economist” magazine did a similar exercise, noting the number of times the word “deflation” was mentioned in major international newspapers (creating a “Deflation index”).
Last week the Reserve Bank Governor said that we are at risk of talking ourselves into recession, so we thought we would update our index. However while we called it an “Optimism Gauge” in 2004, we believe that is more appropriate to re-badge the index as a “Gloom Gauge” in the current environment.
The CommSec Gloom Gauge records the number of times the word ‘recession’ is mentioned in 12 daily newspapers. The newspapers are drawn from each state and territory and include The Advertiser, Australian Financial Review, The Age, The Australian, Canberra Times, Courier Mail, Daily Telegraph, Herald Sun, The Mercury, Sydney Morning Herald, Northern Territory News and The West Australian. The count is obtained from the Factiva news search facility.
The key message is that while we are being confronted with the word recession more than any time in the past we need to focussing on the opportunities posed by low unemployment, super low interest rates, cheap share valuations and low petrol prices and not get swayed by gloomy talk.
Negative talk accelerates
The CommSec Gloom Gauge has soared to record levels over October and November. In the current December quarter, the word “recession” has been used 2,709 times, well up from 1,376 times in the September quarter – and there is still another six weeks of the current quarter to go. By comparison, in the June quarter the word “recession” was used just 933 times. The record low for the Gloom Gauge occurred back in March quarter 2004 with just 163 mentions of the word recession.
The monthly comparisons are even starker. Back in June, the word “recession” was used 243 times in Australian capital city newspapers, or around 8 times a day. That would equate to just over one mention in each newspaper each second day. In October, there were 1,581 mentions of the word “recession” in Australian newspapers.. That equates to 50 mentions of the word “recession” – each newspaper using the word on average four times each and every day over the month. In November to date, the Gloom Gauge count stands at 1,128.
With recessions in force in other regions such as the Euro zone, Japan and the US (although not “officially” declared for the latter) there are obvious reasons for the use of the ‘R’ word in the media. But given the word is highly emotive, its use in the Australian printed media would clearly have a negative impact on consumer and business confidence levels. The risk is that Australian consumers and businesses mistakenly believe that the overseas downturn must lead to similar conditions locally.
Last week, the Reserve Bank Governor says that the biggest mistake we can make is to talk ourselves into a downturn: “Given that we have that scope, and given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness….the long-run prospects for the Australian economy have not deteriorated to the extent that might be suggested by the extent of some of the gloomy talk that is around.”
While there is some justification for the greater use of the term ‘recession’ in newspapers, it is important for investors and analysts to focus on the Australian situation before rushing to judgement that the sniffles and sneezes abroad mean that Australia is similarly at risk of catching cold or pneumonia.
The last recession in Australia – 17 years ago
It’s clearly a very long time since Australia was last in recession – over 17 years ago. The economy contracted in the March and June quarters of 1990 and then in the March and June quarters of 1991. And while we can show what happened to the Gloom Gauge at that time, given differences in data coverage, the results can’t be compared with the current day.
Interestingly however, the Gloom Gauge rose seven-fold between the March and June quarters of 1990 and the same quarters of 1991. However the results for the current period show that the Gloom Gauge rose seven-fold in the much shorter time period from June to October – a matter of just three months.
It is the extent of the deterioration in sentiment over a very short time period that has clearly floored all and sundry from central banks and international financial organizations to individual consumers and businesses.
The problem with recession talk
The main worry with recession talk is the fact the last recession was so long ago, meaning that few people under the age of 35 have memory of such an economic downturn. In some respects this could be viewed positively as there may be less risk of over-reaction. But then again the exact opposite could occur. The fact that people don’t understand about recessions can cause some businesses and consumers to over-react – that is, cut employment and spending when there is no reason to. And that is the chief fear of Reserve Bank policymakers.
Recognising the risk of over-reaction, the Reserve Bank is over-compensating – slashing rates decisively in a short space of time to deal with fear issues and get people to focus on the positives of cheap borrowing costs and the savings reaped by lower loan repayments.
The good news is that there is no risk of complacency in the current environment. The Reserve Bank and federal Government are meeting fears front on, encouraging people to get on with their lives. So far it seems to be working with plenty of anecdotal signs that consumers are keen to spend and businesses are keen to take on much-needed staff.
Source Craig James, Chief Equities Economist, CommSec
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