March 19, 2020 15:13:23
For most of our lives, the economy has just been ticking along doing its thing.
After all, Australia’s had almost 30 years of uninterrupted growth.
But now, economists are using that scary word: recession.
But what does that actually mean for households, for those of us looking to keep paying our bills and buying our groceries?
A recession means the economy is shrinking
It’s technically called a recession when gross domestic product decreases for two quarters in a row.
“People consume less, people invest less, people basically engage with all sorts of economic activity at a smaller scale,” said Dr Xin Deng, an economist with the University of South Australia.
The latest figures we have are from the December quarter, where GDP grew by 0.5 per cent.
In that quarter, Australians produced goods and services valued at about $480 billion — up $2.5 billion on the three months prior.
But economists say the next two quarters are likely to be negative.
And it’s not all because of the far-reaching impact of coronavirus.
The economy was already slowing, with soft consumer spending and construction, the impact of the ongoing drought and the shock of the summer’s bushfires.
Here’s what it might look like
A recession is pretty bad news for everyone — for the Government, for businesses and for households.
Essentially, we’re all part of the economy. So if people stop spending on stuff, businesses get less income and they might have to lay off staff or even close.
That’s when people spend even less.
This is why during a recession we tend to see a rise in business failures, unemployment often goes up, wages don’t grow, property prices often go down and shares fall too.
“There will be more people who will be losing their jobs. Unemployment is likely to increase so that’s something quite imminent,” Dr Deng said.
“[There will be a] higher rate of defaulting on bank loans because people won’t have enough income or revenue to keep the business going or not have enough money to pay back the mortgage.”
The last time we had a full-on recession, in 1990-1991, unemployment went up to 11 per cent. For young people it was worse — about 17 per cent — and bankruptcies soared.
Eek. Can we do anything to avoid a recession?
There are two big players that can have an impact on the economy.
One of them is the Reserve Bank.
You may have heard that Reserve Bank has cut interest rates to a record low of 0.25 per cent (as of Thursday afternoon).
That means households and businesses with debt have more disposable income.
The RBA is also doing something called quantitative easing, which aims to get more money flowing through the economy.
One of the ways they can do this is by buying bonds (which are sort of like an IOU) in order to get cash into the economy.
They are also providing cheap loans to Australian banks.
The other way to boost the economy is for the Federal Government to start spending.
Prime Minister Scott Morrison announced the first stimulus package last week, which includes spending $17.6 billion and targeting two core areas.
The first is cash payments of $750 to people on lower incomes.
“They are the most vulnerable and more likely to have less savings to fall back on. They do need more support, but the second reason is that they are more likely to spend this money to buy things,” explains Dr Deng.
The second part of the package is keeping businesses afloat, including $25,000 cash payments for small to medium-sized businesses and tax breaks for large business.
So far, there have been no packages targeted at sole traders.
The Federal Government is currently working on further stimulus measures, likely to be announced within days.
During the global financial crisis of 2008, Australia narrowly avoided a recession
That was probably due to a combination of things — our economy was in pretty good shape, Australia still had a strong trade with China, the Reserve Bank slashed interest rates and the Rudd government implemented a stimulus package.
Here are three things you can do right now
“The first thing is try to be optimistic as much as possible,” Dr Deng said.
“Don’t panic. I think recession, no matter how severe it is, will not last forever, it will only be temporary.”
Try to shop locally and support Australian businesses that are struggling.
“Consider small businesses — they’re families too and they need help — shop local and help everybody,” suggests financial adviser Nicole Heales.
She said for most households, losing your income would be the biggest problem if a recession hits.
But there are a few sensible things you can start doing now to try and prepare.
“Pay off your credit card debts, do whatever you can to give yourself that buffer so you don’t feel completely overwhelmed if you do lose your job,” Ms Heales said.
If possible, try to cut down on spending, pay down debts and put a bit more savings away.
“People have got through recessions before — it isn’t easy. But things pass, things change and people do get through these things,” she said.
This article contains general information only. It should not be relied on as financial advice.
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March 19, 2020 11:03:53