CommSec’s chief economist Craig James shares his thoughts on whether there will be a recession plus what it will mean for interest rates, jobs, property prices and super.
What exactly is a recession?
The technical definition used by economists is two consecutive quarters (two, 3-month periods) when an economy declines. In other words, two consecutive quarters of declines in GDP or gross domestic product.
Will there be a recession in Australia?
The chances of a global recession have significantly increased. And indeed that has raised the chances of a domestic recession. But a domestic recession is far from certain.
First, the Federal Government is injecting around $15 billion-plus into the economy by the end of June (awaiting second stimulus package). Australian interest rates are at record lows with the Reserve Bank implementing a massive monetary stimulus package that has been estimated at US$105 billion. And the Chinese economy is quickly returning to normal. Businesses may start replenishing stock levels in the June quarter after running down in inventories in the March quarter. It depends on a peaking of COVID-19 cases so we’ll have to wait and see.
It also has to be remembered that this situation is entirely different to past economic shocks. The current shock is a medical emergency rather than an economic emergency.
The crisis has hit at a time when inflation is low, unemployment is historically low, the federal budget is balanced, company balance sheets are healthy and the financial markets are strong.
Once the COVID-19 coronavirus is contained, there is every reason to expect our economy to quickly bounce back.
If there is a recession how long will it last?
The last recession was over 28 years ago, in 1990/91. The recession before that was in 1982/83 and the economy also experienced a recession in 1975. And each occasion was different.
In 1990/91, the economy fell 0.6% in September quarter 1990 and rebounded by 0.6% in the December quarter. The economy then fell 1.3% in the March quarter 1991 and fell by 0.1% in the June quarter.
In 1982/83 the economy fell for four straight quarters after falling for two straight quarters in 1981/82.
Back in 1975 the economy fell for two straight quarters in the September and December quarters.
Source: BsWei (Shutterstock)
What would a recession mean for interest rates?
The cash rate stands at a record low 0.25%. This is effectively “zero”but mathematically the Reserve Bank could follow the Bank of England and cut rates to 0.1%.
The Reserve Bank has detailed a massive four-point monetary policy package that will go a long way in supporting business and the economy more generally.
What would a recession mean for jobs?
In 1990/91 the unemployment rate rose from 5.8% (December 1989) to 11.2% (December 1992). There were similar moves in 1980-1983, from lows of 5.4% to highs of 10.5%. That is why central banks and governments are keen to avoid recession: unemployment can rise sharply in a relatively short period of time.
And then it takes time to get the jobless rate down again. It took more than six years for the jobless rate to fall below 6% after peaking in mid-1983. And it took around 11 years for a similar decline in the jobless rate after the peak of the jobless rate recorded in 1992.
What would a recession mean for property prices?
In the past when sharemarkets were slumping, investors turned attention to property markets. Certainly residential property is in demand at present, underpinned by super-low interest rates and firm population growth.
But clearly there is no single property market in Australia. Each local market has its own supply and demand drivers. And those drivers will determine the price of properties. Changes in nearby local property markets can also influence price levels.
The performance of the job market will be important as to how property markets behave.
What would a recession mean for superannuation?
Superannuation is a long-term asset. There will be periods when returns outperform long-term averages and times of underperformance. But when budgeting or planning, assumptions on returns should be made on long-term averages.
The implications for your superannuation nest egg and returns always vary with your proximity to when you want to use the funds. The closer you are to retirement, the more you are likely to focus on liquidity and capital preservation.
If you are in your 20s, you may adopt a more aggressive strategy with your superannuation assets.
Is there anything you can do to prepare for a recession?
The old adage always rings true: don’t put all your eggs in one basket. Or in other words, diversify, diversify, diversify.
It is always important to spread your investments across a number of asset classes. And in the case of equities, spread investments across a range of stocks and sectors.
Further, it is important to have a manageable level of debt – or more specifically debt servicing.
Sharemarkets have slumped. But they have potential to quickly rebound once the crisis passes, supported by massive monetary and fiscal stimulus by governments and central banks.
About Craig James
Craig James is chief economist at Commsec. Craig is a regular on TV and radio and also does newspaper interviews and writes regular commentaries.
Main image source: Stephen VanHorn (Shutterstock)