Hold your recession horses

Per capita recessions don't exist

The numerator and the denominator

There's a new trend to report - often with a healthy dose of alarm - that we're in a 'per capita recession'.

In Australia, the ABC among others has been banging the drum (see here and here) arguing that living standards for the average citizen have gone backwards since last quarter.

The ABC writes:

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.

But hang on… is that really a ‘key measure’?

Technically, the measure is no good

It's true economists have long been fond of dividing things: income per household, productivity per worker, and of course GDP per capita. The last of these, though, can be a statistical sleight of hand.

GDP per capita is a great proxy for wealth and living standards when comparing countries over time. However, it's a terrible measure of the change in output of an economy in any given quarter.

When a country's population surges, normally due to migration, GDP per capita may fall—even as total GDP rises and economic output grows. In the vast majority of developed economies, population growth in any given quarter is a policy choice.

We saw this in the easing of post pandemic travel. In 2023, Australia's net overseas migration surged to record highs—over 500,000 people in a single year—as the government loosened post-pandemic visa rules to address labour shortages and welcome back international students.

While Australia's total GDP continued to grow between at a rate of 0.2-0.5 percent per quarter, Australia's population - driven by migration - grew faster. As a result GDP per capita fell for two consecutive quarters, and journalists rushed to publish 'per capita recession' articles across all the major mastheads.

It's a bit more complicated than that

In most of the 'per capita recession' journalism, there's an undercurrent of 'although GDP is growing, there's not enough to go around'. This angle gets clicks, but it fundamentally misunderstands how economic development occurs.

Changes in population do not immediately translate into commensurate changes in output - and certainly not in the same quarter. There's a mountain of published literature saying newcomers do not instantly produce goods and services; they need time to find jobs, acquire skills, and integrate into the labour force.

There's ways to speed this up - namely tightly controlled (and often skill based) migration programs, as well as extensive settlement and welfare services when migrants arrive. However even for the best and brightest migrants, their impact will take longer than three months to hit the national economic accounts.

It's true our economic fabric feels pressure—on housing, transport, and services—when population grows quickly. But calling it a "recession" muddies the water. These headlines confuse short-term arithmetic with the long-term economic outlook.

We must be careful not to mistake a shifting denominator for a shrinking economy.