Yahoo Finance Recession explained: Aussies losing jobs and businesses going bust so are we going into recession?
What are the warning signs and how long could a recession last? David Koch has the answers.
Explainer: As interest rates keep climbing and the economy grinds ever slower, there's been a lot of talk about Australia possibly going into recession. But what would that actually look like and how would it affect you?
Compare the Market's economic director, David ‘Kochie’ Koch, explains the warning signs, and why we may not need to worry just yet.
What is a recession?
A recession is a period of sustained economic decline. There are different definitions around the world but here, in Australia, most economists will count two consecutive quarters of negative economic growth as a technical recession. In reality, it’s a time when average Australians are finding it hard to balance the household budget, they’re losing their jobs and businesses are going bust.
You don’t wish an economic recession on anyone. Not only does it cause financial hardship, it can put an enormous strain on relationships as they cope with financial stress.
There are a number of issues that can trigger a recession but, usually, it's a cocktail of compounding elements that shift the dial.
Risk factors include high interest rates, asset bubbles (like inflated property and share values), too much inflation, financial crises, and “black swan” events that no-one sees coming - like the pandemic - which create economic volatility.
Also by Kochie:
What are people most concerned about?
One of the typical fears is a rise in unemployment. Lose your job and your income is cut off. People go into the bunker and cut back on spending, business bottom lines then suffer, and some employers sadly resort to job cuts.
Compare the Market surveyed more than 1,000 Australians in July and found 16 per cent were concerned about the impact a recession would have on their job security.
When was the last recession in Australia?
We’re so lucky to live in this country, for a whole range of reasons, including the fact there’s a whole generation of Australians who have never lived through a major recession.
Australia did have a technical recession during the pandemic in 2020 - that one was impossible to dodge. But the last major recession ran from 1990 to 1991 when inflation was red-hot and interest rates were at a record high. Can you imagine paying off a mortgage today with the cash rate at 17.5 per cent?
It was bloody hard. And the worst part? A lot of people lost their jobs. Unemployment soared to 11 per cent - that’s one in 10 Aussies out of work. It was horrible.
Paul Keating was federal treasurer and he famously said it was “the recession we had to have”. We had a boom-bust economy at the time, which was inefficient compared with our trading partners. That’s when Keating introduced a national savings scheme (the compulsory superannuation we have today) and reduced tariffs to make business more efficient and globally competitive.
Those reforms of the last recession are the major reason we haven’t had one since.
What are the warning signs of a recession?
Recessions can be hard to predict because risk factors are fickle.
Warning signs can include falls in consumer spending, business confidence, property prices and a spike in mortgage defaults and business insolvencies.
The pricing of government bonds can also provide an indicator. Everyone thinks government bonds are boring, but they can be a critical crystal ball into the future of the economy.
In normal investing, the longer you lock your money away for, the higher the return you should earn for making that commitment. It makes sense. It’s called a “yield curve”. You earn less interest on short-term savings and higher interest on longer-term savings.
An “inverted yield curve” is the reverse. It happens when investors think interest rates will fall in the long term because the economy will be weak and a cut in interest rates will be needed to stimulate it.
How long do recessions last?
Recessions can last anywhere from six months to a few years, depending on their root cause and how they are managed. It basically depends on what the federal government and Reserve Bank (RBA) do to stimulate or change the economy.
Longer recessions may be considered ‘depressions’. The last time Australia had one of those was in the early 1930s, when unemployment was thought to be around 20 per cent following the 1929 Wall Street crash.
And of course, even when economies bounce back, certain side-effects linger. Job loss and financial stress can be absolutely devastating for families. People who are out of work for protracted periods may face skills gaps as processes and technology advance. Then there’s the impact on mental health.
Can recessions be prevented?
In some cases, yes. We’ve seen Australia dodge them in the past (we made it out of the Global Financial Crisis, and before that the Asian Financial Crisis without a bust).
But it really depends on the root causes.
The RBA has been hiking rates to cool inflation, but it’s wary that a heavy hand could knock us into recession. Their goal is to achieve a “soft landing” for the economy - that means putting the brakes on consumer spending, gently, to slow growth, to bring inflation down without a major downturn.
That might mean Aussies need to tighten their belts a bit more. But some compounding factors are beyond their control.
Could Australia be headed for a recession now?
There are some concerns that the RBA’s latest rate rise may have been a step too far.
We know that more mature households that have been building savings buffers for years are probably well-equipped to manage the rise in costs and mortgage repayments. But then there are many new homeowners who’ve had to buy at higher prices and now have to manage higher interest rates.
Compare the Market figures show Australians with a $600,000 variable mortgage could be paying $1,552 more each month than they were at the start of May 2022, due to the 4.25 per cent cash-rate crunch.
The household saving-to-income ratio fell to 3.2 per cent in the June quarter - its lowest level since 2008.
We really are at an economic tipping point. Inflation is staying stubbornly high and an increasing number of companies are laying off staff. But property prices are still rising (which makes us feel rich) and our record migration numbers are boosting retail sales. Without those 500,000 new customers (migrants) Australia would be in a recession right now.
At this time, I think Australia will avoid an economic recession, but only just. The December-quarter CPI figures should show a marked improvement on the September quarter, which should allow the RBA to stop any more rate hikes and even look at cutting if the economy tips over into recession.
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