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The recession is not over: Here’s what it means for you

Samantha Menzies
·Contributing editor
·7-min read
Australia's recession isn't over yet. (Source: Getty)
Australia's recession isn't over yet. (Source: Getty)

Australia’s first recession in 30 years is “technically” over.

A recession in Australia is defined by a contraction in economic growth over two consecutive quarters. The March quarter fell by 0.3 per cent. The June quarter went backwards by a whopping 7 per cent.

But the Reserve Bank’s Guy Debelle thinks the September quarter growth will be positive and therefore the headlines were: “Australia is out of recession”.

But we’re far from out of recession.

Because really what matters at the moment is jobs. And with unemployment and household debt at record highs – we’re not out of the woods yet.

More on the 2020 Recession:

What a recession means for your interest rates

Interest rates tend to go down during a recession as governments attempt to stimulate spending in order to slow down any decline in the economy by cutting interest rates.

Low interest rates help to stimulate growth by making it cheaper to borrow money, and less favourable to save which in turn prompts both individuals and businesses to take advantage of low-cost borrowing and the opportunities to make or save money.

For example, during the 1990-1 recession in Australia, the Reserve Bank reduced its official cash rate from 17 per cent to under 5 per cent over 3.5 years in order to stimulate growth.

For the COVID-19 recession, official interest rates were cut to 0.25 per cent in March as the COVID-19 pandemic hit our economy and saw it dive into a once-in-a-lifetime recession before cutting again just last week to a new record low of 0.10 per cent.

While banks decided to keep variable rates unchanged following the latest cash rate cut, they did opt to cut fixed-rate home loans to around 2 per cent (depending on the lender).

This means someone with a 2 per cent fixed-rate home loan for $400,000 over 30 years making the minimum repayment of $1,478 per month, would save $331,101 over the life of the loan or $920 per month, versus the same loan when interest rates were 6 per cent.

But while Governor Philip Lowe says the Reserve Bank plans to keep rates at its record-low on hold for the foreseeable future, it is unlikely to follow in the footsteps of the Eurozone and Japan and implement a strategy of having negative interest rates.

With the RBA targeting 0.25 per cent for the Commonwealth government bond yield, Lowe is indicating that, based on the current outlook, a change in the official cash rate is unlikely before 2023.

What a recession means for your wages

After a steady period of wage growth, Australia’s wages recorded the lowest annual growth in the 22-year history of the wage price index thanks to the coronavirus recession, recording an increase of only 0.2 per cent in the June quarter.

Going forward, the government expects wage growth to remain low with little expected improvement for some time to come.

The Budget papers last month show the government projection that wage growth will sit at around 1.25 per cent until June 2021 before climbing only slightly to 1.5 per cent through to June 2022.

But the expected wage increases in 2020-21 could actually amount to a real wage cut because the consumer price index is forecast to rise by 1.75 per cent over the same period.

The budget revealed that the government expects wage growth to remain below average (average weekly earnings as of May 2020 was $1,713.90) over the forecast period, but that a declining unemployment rate beyond the December quarter 2020 is expected to support a gradual pick-up in wages.

What this means for you in a nutshell is a delay in wage increases and as a result, lower income. This could also be exacerbated by businesses looking to cut or freeze wages in order to survive through the recession.

What a recession means for your cost of living

While newly-implemented income tax measures in this year’s Budget will go some way to assist with cost-of-living pressures, believe it or not, we could actually expect the cost of living in Australia to go up.

Call it the ’coronavirus tax’.

Aussies hoarding necessities such as toilet paper, dry food and hand sanitiser has driven Australia’s inflation on some products to record highs.

While ABS statistics for the June quarter show the overall consumer price index (CPI) has fallen 1.9 per cent, which is the largest quarterly fall in the 72-year history of the CPI, that is largely attributable to free childcare, a fall in pre-school and primary education and a drop in the price of petrol over the quarter the pandemic hit.

But if those factors are excluded, the CPI would actually have recorded a 0.1 per cent increase over the quarter.

The fact some products were under such high demand has driven prices up significantly. Cleaning products jumped 6.3 per cent, prices of other household items and toilet paper was up 4.5 per cent, furniture prices rose 3.8 per cent and household appliances and audio, visual and computing equipment prices jumped 3.0 and 1.8 per cent respectively.

Combine this with restrictions on travel, pressures on goods transportation and less overseas imports has the potential to push prices for some groceries and products even higher as businesses look to pass on costs to their customers.

What a recession means for your superannuation

Interest rate cuts and quantitative easing measures to stimulate economic growth mean asset and investment prices are likely to continue to go up despite the negative outlook, but in the long-term this will create more risk.

“The long-term outlook is a bit riskier, as the reality of the underlying economic situation could kick in at some point if financial markets lose their confidence in the central banks.

“Total long-term returns are probably going to be lower than they’ve been in recent cycles,” AMP Australia chief investment officer Lakshman Anantakrishnan explains.

CommSec’s chief economist Craig James agrees that given superannuation is a long-term asset, there will be periods when returns outperform long-term averages and times of underperformance. But 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,” he told Canstar.

What a recession means for your savings

Whether you’ve been saving for a home deposit or a new car, or simply putting money aside for a rainy day, the current economic climate may be making you fret about your nest egg.

Unfortunately, while record-low interest rates are a great economic survival and recovery technique and excellent news for Aussies wanting to borrow money, it’s not good news for your personal savings because the interest rates are so low.

A year ago, the average big four bank ongoing saving rate was 1.77 per cent. Now, it is just 0.81 per cent. This is a difference of 0.96 per cent in a year, however, the cash rate has only dropped by 0.75 per cent during this time, RateCity explains.

What this may mean for your nest egg is that you are potentially not getting as high of a return as you should.

For example, a savings account with $10,000 in savings and 0.81 per cent interest will earn you just $410.37 over the course of five years.

By comparison, at last year’s 1.77 per cent interest rate $10,000 in savings would have earnt $914.11.

This is a stark comparison to the same savings over the same term, but with a 5 per cent interest rate, fetching you $2,754.26.

What a recession means for your job

Generally in times of recession, Aussies limit spending and businesses tighten their purse strings which unsurprisingly affects jobs in many non-essential industries.

But what is unique about the current coronavirus recession is that we are also seeing an accelerated loss of employment in industries with workers in routine manual jobs and sectors which struggle to operate with new social distancing measures.

Those jobs most at risk include anything which can be automated, travel and tourism jobs, entertainment workers, hospitality and restaurant workers, exploration and mining jobs, transport and warehousing jobs, construction workers and real estate jobs.

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