Australia Markets open in 7 hrs 16 mins

3 reasons you don't want a recession

David Taylor
Contributing Editor
Red sign hanging at the glass door of a shop saying: "Going out of business". Source: Getty Images

Here’s the simplest line on the economy you’ll get: Australia is not in recession, nor do we look like entering one soon.

However, there is a lot of commentary around talking about the risks of a recession, or the fact that the retail sector is already in recession.

The Australian economy is also under constant threat from global ‘trade winds’. What do I mean by that?

Simple really. Australia is an ‘open economy’ – meaning the country’s fortunes are reliant on the success of other nations, like China, in particular.

That’s why the US China trade war is being watched so closely. If China’s economic growth slows suddenly, Australia would, most likely, be dragged into a recession.

And the reason I said at the top a recession was unlikely is because a major Chinese economic slowdown is not really being factored into most economists’ forecasts.

All of that said, households around the country are struggling enough to prompt both the Reserve Bank and the federal government to hand out cold hard cash (in the form of interest rate and tax cuts).

They want you to spend the money. Some of you will, and some of you won’t. So, what happens if none of it works, and we slide into recession? Well how about we do what we can to prevent that from happening?

Here are three reasons to get upbeat about the economy… and maybe spend a little more at the stores.

Unemployment

If you have a job in a recession you should consider yourself lucky. Just on that, the chances of being made redundant during a recession sky-rocket.

The profitability of firms obviously falls, and cost cutting gets underway. If your job isn’t vital, it’ll go.

The unemployment rate began rising in the lead up to the 1991 recession, then really took off during the recession. It wasn’t until after the recession it began to fall again.

Of course, if you do lose your job in the middle of a recession, it’s incredibly hard then to find work. Talk about soul destroying!

If you’re part of the special few that keep your job against all the odds, you can forget about asking for a pay rise.

There are, of course, exceptions to all of this. Some occupations in health and education are reasonably recession-proof, but if you landed a job during better economic times, chances are you’ll lose your job when the economy wobbles.

Losing money

It goes without saying that if you lose your job, you start losing money. That is, your income plummets but your expense remain the same.

Often money that is tied up elsewhere also starts to go. If you have property, or a share portfolio, for example, the value of those assets will fall.

Even if you only have cash in the bank, interest rates are currently yielding next-to-no income for deposit holders, so, during a recession, you can expect to be paying the bank (negative interest rates) to have your money held ‘safely’.

Getting out is hard

Recessions are often self-fulfilling. People spend less and that hurts business more, and they then layoff more workers, and people spend less… further hurting businesses.

It’s incredibly difficult to generate economic activity when no one wants to part with their cash. Hence the term “recession”, economic growth “recedes”. The economy essentially goes backwards.

During a recession, governments need to implement major, hard-to-swallow economic reforms. It’s the best time to do this sort of stuff though because the electorate just says, ‘do whatever you have to do to get us out of this mess!’

Ironically, even if those reforms result in improved economic conditions, the residing prime minister is likely to be thrown out of office.

In any case, it’s usually a gradual, tough grind out of a recession. It doesn’t happen overnight. It’s a sobering experience.

Often necessary but never desired

Recession are a bit like a cold, you just have to endure them. There are only ‘drugs’ or things the government, the Reserve Bank, and other policy makers can do to ease the pain of the ‘cold’. There’s no cure, as such.

While commentary and analysis around a recession often sells newspapers and makes for a great headline, it often leads people to worry more, which doesn’t help in preventing a recession.

That’s why I’m penning this column. There is a chance the global economy – led by China – will slow dramatically (after the Reserve Bank has cut interest rates further and the government has spent its small surplus). In that case, yes, we’re most likely in trouble for a while… but we can do a lot now to prevent or minimise the disruption that could cause.

The solution is simple: For now, keep your chin up, because we’re not there yet.

@DaveTaylorNews

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.