The acknowledgment last week by Michele Bullock, the governor of the Reserve Bank of Australia, that the cumulative effect of this year’s five increases in interest rates “is going to make people feel like it’s a recession” has put the R-word back into circulation.

It comes as Qantas becomes the third major Australian company in three weeks to announce large-scale job cuts, following restructures at Canva and National Australia Bank.

Although there is no universally accepted formal definition of a recession, a widely used rule of thumb is that a recession is denoted by two or more consecutive quarters of negative growth in real GDP.

In my long-held view, that’s a flawed yardstick – it would have excluded the recession of 1974, when real GDP only fell in one quarter (albeit by an out-sized 2%), and it would have identified the second half of 1977 as a recession.

A better gauge, in my view, is the so-called Sahm rule, so-named after its inventor, former Federal Reserve economist Claudia Sahm, which identifies a recession as occurring when the three-month moving average of the unemployment rate rises by half a percentage point or more relative to the minimum of its three-month moving average over the previous 12 months.

Reserve Bank staffers consider that a three-quarter percentage increase in the three-month moving average relative to its low over the preceding 12 months is more appropriate in the Australian context (given the greater volatility in our monthly unemployment rates than in the US).

That definition of a recession wouldn’t be triggered if the RBA’s latest forecasts, which see the unemployment rate rising to 5.1% by the end of 2028, come to pass.

But if the unemployment rate were to drift up at the same rate as it has done, on average, over the past six months, then the “modified Sahm rule” would be triggered in........

© The Guardian