Australia suffered GDP per capita Recessions (while growing!)

Interesting read about Australia and its per capita GDP recessions today! In 2020, when the pandemic hit and governments told everyone to stay at home, the economy of many countries crashed, and Australia’s was no exception. For the first time in almost 29 years (isn’t that insane?) the Australian economy was in a technical recession. (Yes, 2001, 2008, they avoided those recessions.). But does that mean that things were always rosy? The St. Louis Fed argues nope.

Quick reminder: What is a recession again? Here, we’re talking about technical recessions: the economy drops for two quarters in a row. And we measure this by looking at economic output as measured by GDP. That last bit is important, because one way to grow an economy is to grow the population.

Does the economy grow with the population?

If you got an economy, how do you increase its output?

One way: you’re smarter today than yesterday—you invent something that allows you to do things faster, or produce stuff more easily. The same number of people can do more in less time. That’s producitvity, and you’ve done it: the economy grows!

But the simplest way really is to just have more people in work. More people working every day means more stuff produced, more services rendered—the economy grows!

Because we’re looking at the economy through the GDP lense it’s actually not so much about the population but about the work force. (Note that GDP is picky: you can work your ass off but if what you do doesn’t result in a sale then that work doesn’t count towards GDP.)

So in general: population grows -> work force grows -> economy grows.

But what if the population grows faster than the economy?

GDP per capita recessions: when the population grows faster than the economy

That’s what today’s article is about: Yes, the Australian economy grew for some 28 years—but the population grew, too! If you remove that population growth, things didn’t always look so great for Australia.

Removing the population growth means you divide GDP by the number of people: GDP per capita. Take out inflation and you end up with “real per capita GDP”. If we’re using that to look for recessions, Australia ends up with three “per capita recessions”.

The pie is growing … but everyone now gets a smaller slice.

What does that mean? Simply that the population grows faster than the economy: yes, the pie is growing … but everyone now gets a smaller slice. (Assuming everyone gets an equal share.)

That’s obviously not great.

Comparing countries with per capita GDP

As a side note: GDP per capita is one way to compare the economy of countries.

Let’s say you want to compare the economies of Switzerland and the US. Looking at GDP is difficult: Switzerland has some 6 million people while the US has more than 300 million. That’s more than 50x as much. The economies show that that difference: roughly 731 versus 21,000 billion US dollar.

But … wait, that’s only about 30x as much? Yes! And that’s where GDP-per-capita is helpful.

In 2019 Switzerland had a GDP per person of about $85k—versus $65k in the US. That means per person the economy in Switzerland was bigger than that of the United States. Or put differently, each worker in the Swiss economy produced more value than each US worker.

In short, looking at GDP per capita allows you to compare apples to apples because you remove the “population size problem”. Neat, right?

Conclusion

All that means we’re way too much hung up on simple ideas like:

The economy is growing? Great!
We avoided a recession, phew!

But … is the economy growing faster than the population, or not? Did we avoid a technical recession but everyone’s costs of living explode? Probably would do us well to look a bit deeper. And that’s why today’s article was a nice read.