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Global recession storm clouds are now overhead: Here's how it affects you

David Taylor
Contributing Editor
Here's why we care about the global economy, and how the health of the global economy affects your hip pocket, writes Dave Taylor. (Source: Getty)

Australian and global economic headwinds will be discussed at Yahoo Finance's All Markets Summit on the 26th of September. Join us for this groundbreaking event.

The “global economy”… I’m just going to leave that hanging.

What on earth does the term even mean? It’s hard to conceptualise the “Australian economy”, let alone the “global economy”.

So let’s just get right to the heart of why we care about the global economy, and how the health of the global economy affects your hip pocket.

Here goes…

Open for business

Australia is an open economy. That means it’s “open” for business and trade with the rest of the world.

Last week we found out, with the release of the nation’s official economic growth figures, that Australia’s economy is being supported by government spending and, you guessed it, exports.

What does the world (aka global economy) buy from us? Coal, iron ore, gas, tourism experiences and education.

In fact the stats show Australia’s trade position is the best it’s been in over 40 years!

Australia is in demand!

The big question now is, can it last? And if it can’t, what does that mean for us?

Storm clouds are already here

I’ve written plenty of pieces over the past decade about approaching global economic storm clouds.

While the storm clouds took longer than expected to arrive, they are now here.

China’s (Australia’s largest trading partner) economic growth rate, for example, has slowed markedly over the past decade. In fact it’s roughly halved.

Although we don’t rely on trade from the UK and Germany quite as much, both of these economies are now going backwards. Neither are technically in recession but they’re heading that way.

The Japanese economy, and the eurozone as a whole, haven’t been right for years.

How did we get here?

The global financial crisis in 2008/9, and its legacy, has done a lot of the damage.

After a lot of dodgy dealings, big name investment companies around the world have struggled to right themselves, and the lack of trust and confidence in those institutions has produced something of a cancer on the business community, and their workers, the world over ever since.

Donald Trump was elected president back in 2016, in part, because US workers ‘downstream’ from Wall Street (where the damage began), in factories and manufacturing plants, who had been laid off, wanted some hope of getting their jobs back (which Trump promised he’d do).

The US-China trade war, which is playing out before our eyes now, is part of that effort…but also a reason for much of the global economy’s current problems.

Too many problems, not enough solutions

For decades, Trump says, China has been getting a “better deal” in its trade relations with the US.

He has a point. But the system is too complex and delicate (still recovering from the GFC) to be unwound with something as crude as a trade and currency war.

In any event, it’s already doing damage to China’s economy and, you could argue, to countries who trade with China like Germany and the UK.

However, the Brits have another problem on their hands: Brexit.

Brexit, or the UK’s astonishingly bad attempt to leave the European Union, is already slowly killing the country’s manufacturing sector. Of course the fear is that a “hard Brexit”, where the UK leaves the EU without a basic plan, will cripple many other industries as well.

If the UK and China aren’t enough, we’re also seeing serious economic and political instability in some South American countries and southern European countries as well.

The real problem is, of course, people who don’t have much money want more, and those not in power, want to be in power. This creates economic earthquakes in countries that are struggling financially.

Consumer to the rescue?

The team at JP Morgan Australia sat down and had a look at all this and concluded that there’s a 40 per cent chance the global economy, made of all the countries mentioned above, will slip into recession.

That same team also concluded that if that probability rises to 50 per cent (think Brexit dragging out and the US-China trade war getting more nasty), the Australian economy will look “vulnerable”.

Why? You ask.

Well economists say there’s a limit to how long government spending and exports can prop up our economy. Ideally you’d have the consumer (shoppers – which make up the bulk of economic activity), coming to the party and spending more at the stores.

For now though, that isn’t happening. Households are too busy paying off debt, meeting the rent, paying gas bills, car and health insurance.

Your hip pocket

You can see why there’s increased talk of Australia also slipping into recession: if government spending doesn’t pick up, and interest rate cuts and tax offsets don’t get shoppers spending at the stores, economic activity may slow further.

But here’s the thing. The government prides itself on being a good manager of the economy. It also has plenty of economic firepower to withstand a global downturn.

So, if the global economy does slip into recession, and the Australian economy comes under a lot of pressure, you can expect even lower interest rates, a lower Australian dollar, and more government spending (on infrastructure, for example).

For everyday folks, that means it’ll be easier to pay off the mortgage or credit card, and for businesses it’ll mean the same, but with the lower Australian dollar, their goods might become more internationally competitive.

More government infrastructure also means more job opportunities.

There is a catch unfortunately. If a global economic downturn does hurt Australia, people who are unemployed, or lose their jobs in the process, or who are renting, could find life very challenging.

So now, while the economy is still growing, the best thing you can do is find as secure work as you can, and if you’re thinking of buying property, and you’ve got the means to do it, now’s not a bad time to get your act together.

A financial storm is like any other, it’ll pass, but sensible thinking and preparation are the best ways to ride it out.

All that said, Australia is now in its 29th year of economic expansion. With any luck, that will continue.

@DaveTaylorNews

Yahoo Finance’s All Markets Summit is on the 26th of September 2019 at the Shangri-La, Sydney. Check out the full line-up of speakers and agenda for this groundbreaking event here and buy tickets here.

The inaugural Yahoo Finance All Markets Summit will launch on September 26 in Sydney's Shangri-La.