“Recession” is one of the most feared words in economics, and GDP is the number that decides when one arrives. Here’s what both really mean.
Gross domestic product, or GDP, is the most common measure of the size of an economy.
It adds up the value of all the final goods and services produced in a country over a period of time, from mining and farming to haircuts, software and health care. When GDP rises, the economy is growing. When it falls, the economy is shrinking.
In Australia, the Australian Bureau of Statistics publishes GDP every three months in its national accounts, usually about two months after each quarter ends. Most reports focus on the growth rate, either over the quarter or over the past year, after adjusting for inflation so price rises aren’t mistaken for real growth.
GDP can be measured three ways that should arrive at a similar answer: by adding up everything produced, everything earned as income, or everything spent by households, businesses, governments and overseas buyers. The spending side, which includes household consumption, investment, government spending and exports minus imports, is the one most often discussed in the news.
When does a slowdown become a recession?
A common rule of thumb is that a “technical recession” is two consecutive quarters in which GDP falls.
It’s a useful shorthand, but economists treat it as only part of the picture. A proper recession usually means a broad, lasting decline in economic activity: falling output, rising unemployment, weaker spending and business failures. In the U.S., for example, recessions are officially dated by a committee of economists that looks at a wide range of data rather than a two-quarter rule.
Australia has had very few recessions in recent decades. The economy famously went almost 30 years without one, until the COVID-19 pandemic in 2020.
Headline GDP can also hide what’s happening to people. If the population grows quickly, the economy can expand overall while output per person falls. That measure, GDP per capita, is closely watched as a guide to living standards, and a fall in it is sometimes called a “per capita recession”.
That’s why economists, and the Reserve Bank, look at GDP alongside other measures such as unemployment, wages, household spending and inflation to judge how the economy is really travelling.
