“Is Australia in recession?” With a Consumer Price Index inflation of 6 per cent, which peaked at the end of 2022 at 7.8 per cent – the highest in 32 years – it’s a question on many lips.
To address this question, we first need to understand what a recession means. Then, we will evaluate the current state of the Australian economy in that context.
What exactly is a recession?
A recession is a phase in the business cycle where economic output declines. This output refers to the total value of goods and services produced by an economy over a specific period.
Imagine the economy as a giant machine that produces goods (like cars, food, and clothes) and services (like haircuts, education, and entertainment). The more this machine has, the better the economy is doing.
When experts want to see how much this machine (the economy) produces, they look at the Gross Domestic Product or GDP. Think of GDP as a scorecard for the economy.
There are different ways to calculate this score:
- Production approach: This method measures the total output of goods and services minus the value of goods and services used to capture the net output.
- Income approach: This sums up all the incomes earned by residents of a country. It includes wages earned by workers, profits made by companies, rents from properties, and taxes collected by the government, minus subsidies.
- Expenditure approach: This calculates the total expenditure made within an economy. It includes household consumption, investment by businesses, government spending on public services, and net exports (exports minus imports).
While there isn’t a universally agreed-upon definition, it’s generally accepted that a recession occurs when the GDP score goes down for a while. Meaning there’s a period of reduced output combined with a significant rise in unemployment.
This downturn in economic activity can be short-lived (a few months) or extended for a longer duration (a couple of years).
What are the indicators of a recession?
While the decline in GDP is a primary measure of whether we’re in a recession, several other indicators provide a piece of the puzzle. When several show negative signs simultaneously, it’s a strong hint that the economy might be heading towards, or already in, a recession.
A spike in the unemployment rate can be a direct consequence of businesses facing tough times, and it’s one of the first things experts look at when gauging the health of an economy. This is because when businesses face challenges–maybe because people aren’t buying as much or costs are rising–they might need to cut costs, and one way they do this is by laying off employees.
People buy things when they feel confident about their financial future. If they’re worried about losing their jobs or the economy, they might hold back on spending, especially on non-essential items. This drop in spending can create a domino effect, which might lead businesses to produce less or even lay off workers.
If factories produce less, it can mean there’s less demand for those goods or that the businesses anticipate fewer sales in the future. A slowdown in production can lead to job losses in industries and can be a sign that the economy is not doing well.
When stock prices are falling consistently, it often means investors are worried about the future of businesses and the economy as a whole. While the stock market can be influenced by many factors and volatile in the short term, a prolonged downturn in stock values can indicate broader economic challenges.
For an economy to grow, businesses must invest, whether opening new stores, buying more equipment, or researching new products. If companies are holding back on these investments, it’s often because they’re uncertain about the future. A decline in business investments can slow economic growth and is a sign that businesses are cautious.
What causes economic recessions?
Recessions can be triggered by interconnected factors. For instance, rapidly rising prices–something we’re currently observing in Australia–can dampen consumer spending.
Such economic challenges can be made worse by unexpected global events. Take, for example, sudden oil price hikes or the pandemic, which disrupted global trade. These can send shockwaves throughout the global market.
Similarly, financial bubbles, where assets like housing or stocks become significantly overvalued, pose a risk. When these bubbles burst, they can send economies into recession.
In response to such challenges, central banks might raise interest rates to keep inflation in check. However, this action can reduce borrowing and spending, which leads to economic slowdown.
What happens during a recession?
Recessions can profoundly impact the economy and society. When this happens, businesses produce fewer goods and services, which leads to a drop in the GDP and less money being made overall. Because of this, companies might let go of some workers or even close. Seeing the economic instability, individuals might decide to spend less and save more.
To help get things moving again, central banks often make it cheaper to borrow money by lowering interest rates. This is done to encourage people to spend. But, the downside is that your money saved in the bank earns less interest.
Is Australia in a recession now?
As of this writing, it’s a yes and a no. Some reports suggest that Australia’s economy is slowing down a bit. This is partly because the big banks have made borrowing money a little more expensive. But, the good news is experts believe Australia might avoid a full-blown recession.
However, the country is experiencing a “per capita recession.” This means that even if the whole country’s economy is growing a bit, the average person might not feel the benefits. The main reason is that the economy hasn’t kept pace with population growth. This means even if Australia is making more money, there are more people to share it with. So, for many individuals, it might feel like there’s less to go around, leading to tighter budgets and a sense that things aren’t improving, even if the big picture says otherwise.
Who benefits from a recession?
While recessions are undoubtedly challenging and bring hardships for many, they also present opportunities for the following:
If you have some savings, a recession can be a prime time for you. Assets like real estate and stocks often come with lower price tags. You might also find that many goods and services become more affordable, allowing you to stretch your dollar further. And if you’re a fan of discount stores, you’ll notice they often thrive as others, like you, seek quality products at lower prices.
Those who want to borrow
For businesses that have kept their debts low, recessions can offer a chance to borrow at reduced interest rates. This can be an opportunity to finance expansions, invest in new projects, or buy assets.
Similarly, if you’re considering buying a home, the combination of lower property prices and cheaper borrowing rates can make recession a suitable time.
Even in a downturn, essential services remain in demand. So, you might find stability if you’re in sectors like grocery retail or utilities. If you’re a professional specialising in bankruptcy and restructuring, your expertise might be in higher demand. On the flip side, you might notice an uptick in debt collection efforts if you’re facing financial challenges.
Lastly, if you’re after long-term investment, you can also benefit by purchasing shares in promising companies at reduced prices.
How should I prepare for a recession?
What you should do
Build emergency fund
Setting aside money for unforeseen circumstances ensures you’re covered for unexpected expenses or if your income takes a hit. If you need help with how much to save or how to start, the 50-20-30 budget rule might offer some guidance.
The less debt you have, the better positioned you’ll be during economic downturns. If you have multiple debts, this guide can help you get out of debt.
Cut unnecessary spending
Streamlining your expenses can free up more of your income for savings or debt reduction. But often, it’s easier said than done. For practical advice on managing your finances, learn how to stick to a personal budget.
Protect your credit during a recession
Maintaining a good credit score can be crucial, especially if you need to borrow money or refinance in the future. For more on this, refer to our other blog that discusses how to protect your credit during a recession.
What you should not do
Avoid panic selling
It’s normal to let emotions drive your decisions when markets are volatile. But, selling assets in a panic can lead to losses. If you’re not desperate for money, stay calm and think long-term.
Don’t assume it will be short-term
While we all hope for quick economic recoveries, it’s wise to prepare for more prolonged downturns. This mindset can help you make more sustainable financial decisions.
Don’t fall for scams
Tough times can lead to a rise in fraudulent schemes such as low-risk, high-return investments. Always be cautious and do your research before making any financial commitments.
Don’t make impulsive financial decisions
Whether making large purchases or refinancing, always weigh the pros and cons. For instance, while it may be tempting to refinance your home loan due to lower interest rates, a recession may not be the optimal time.
Don’t avoid seeking help
An economic downturn is precisely when turning to financial professionals is crucial. Whether you’re looking to restructure your debts, find smarter ways to manage your expenses, or even spot financial opportunities you hadn’t considered, they can offer strategies that fit your situation.
Debt Relief Help with Debt Negotiators
If you’re feeling overwhelmed with financial burdens and don’t know where to start, reach out to us for debt relief help. We will guide you through navigating these challenging times.