There is an entire generation of Australians that have never encountered a recession before.
As long as I can remember, the streets have always been filled with people, restaurants, cafes and eateries are packed to the brim and most people have had jobs and homes to go to.
But now, streets are deserted, restaurants are closed, tens of thousands of employees have lost their jobs in a single day and Centrelink lines stretch across several blocks.
After Australia’s horror summer, which saw the Australian bushfire crisis morph quickly into the coronavirus crisis, Australia’s 28-year dream run has turned quickly into a nightmare.
A global recession has been predicted for the first half of 2020, with the downturn expected to be “comparable” to the global financial crisis, according to Oxford Economics.
AMP Capital chief economist Shane Oliver is predicting a 3.5 per cent cut to Australian GDP, but warns it could be greater.
If you’ve never lived through an economic downturn before, here’s what to expect – with a little twist.
What is a recession?
A recession is a decline in economic activity, meaning businesses and individuals are spending less money. The technical definition of a recession is when GDP contracts for two or more quarters.
There can be several reasons for a downturn, but the one-two punches of the bushfires and the virus pandemic have exacerbated an economy that was already quite weak to begin with, with wage growth stalling, interest rates at all-time lows, businesses hesitant to invest and household debt high.
What happens in a typical recession?
Before the fires and the virus, a weak retail sector – a combination of thrifty customers and the growth of online shopping – was already biting into several retailers who were forced to close their doors.
The Australian bushfires were catastrophic for people’s homes and livelihoods, Australia’s air quality, natural environment, infrastructure and for the tourism economy.
People whose houses burnt down will have to rebuild and aren’t left with much money to spare.
Either due to dwindling sales, natural disasters or health pandemics, businesses are forced to close their doors.
The direct result: workers are let go.
Jobs are lost
“Good businesses shut, not because of any mismanagement, but because next to no one is buying their produce,” independent economist Stephen Koukoulas told Yahoo Finance.
“People lose their jobs, often for months and years of high unemployment follow.”
And many Australians aren’t prepared for it. Deloitte Access Economics’ Financial Consciousness Index has revealed that more than 13 million Australians don’t have enough savings to fall back on if they weren’t able to earn an income for more than three months.
Bills don’t get paid
Lose your job, and suddenly paying rent, phone, internet, and utility bills become much more of a struggle.
And then there’s the mortgage to pay. A loss of income would mean more and more mortgage-holders start falling behind on their repayments and go into arrears.
But mortgage arrears have been at levels we haven’t seen since 2010, according to Reserve Bank of Australia head of financial stability Jonathan Kearns.
All the ‘extras’ thrown out the window
Without an income, every expense that isn’t absolutely essential is thrown into question.
“The first thing that goes out the window is all the frivolous, for want of a better word costs, that you probably don’t need to spend on,” Finder insights expert Graham Cooke told Yahoo Finance.
“People tend to sell whatever’s costing them money. This is really where your savings account comes into play.”
One of the first things to go tends to be holidays and travel plans, spending on new things, eating out or going for Friday drinks.
Beauty appointments are reconsidered and kids’ extra-curricular activities also get cut down. Gym memberships also go, as well as extra streaming services and health insurance.
“Health insurance is one of those $2,000-$3,000 extra dollars a year that if you’re running into difficult times you’re gonna jettison,” Cooke told Yahoo Finance.
“When you lose your job, you’re only concerned about keeping a roof on your head.”
From bad to worse
It’s a vicious cycle: consumers who are less willing to spend means more and more businesses will struggle, and it goes on. “It all feeds off itself.”
And of course, the property market suddenly finds fewer buyers, meaning house values drop: Oliver is predicting a 20 per cent slide in house prices.
Global stock markets have also been volatile for the last few weeks, and investors saw several days where hundreds of billions of dollars were wiped off every time – and we don’t seem to have reached the bottom yet.
Coronavirus-led recession: Why this will be different
However, there’s light at the end of the tunnel. While Australia’s economy wasn’t in the strongest standing to begin with, the reason behind most business closures are circumstantial and specific to the virus.
“Hopefully this is only temporary because it’s been caused by the shutdowns as opposed to policy tightening and an unwinding of exuberance in the economy,” Oliver told Yahoo Finance.
“And Government policy support has been a lot faster than normal to ramp up, so if the virus comes under control in say 2-6 months, we should bounce back faster than is normal after recessions.”
The Morrison government has so far announced two stimulus packages totalling $83.6 billion, to cushion the economic blow on individuals and businesses impacted by the stringent restrictions implemented to curb further spread of the virus.
The government will spend a combined $22.9 billion on income safety nets of $550 per fortnight for those who have lost their jobs, sole traders and casuals and a $750 one-off supplement for those on certain welfare, pension and concession payments.
Australia’s banks have also thrown a $100 billion lifeline, which will pause mortgage repayments for six months, and the government will convene in a National Cabinet meeting on Friday evening to discuss laws that will prevent landlords from evicting tenants who have fallen into financial hardship as a result of Covid-19.
Australia’s economic recovery is now largely in the government’s hands, and it will be “critically important” that the government minimises the economic fallout, says Koukoulas.
“It does this by pumping money into the economy, making it easy to get social security payments so people can survive. It is why policies are needed to see the economy as strong as possible to reduce the human costs of high unemployment.”
It’s just a matter of waiting for the virus to come and go.
“We’re going to close businesses but we’re going to reopen again. But once that happens everything should kick off pretty quickly,” said Cooke, though he acknowledged that some businesses who close in this period will never re-open.
“We’re going to hire people back. It should be a pretty quick recovery.”
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.
Follow Yahoo Finance Australia on Facebook, Twitter, Instagram and LinkedIn.