What is a recession and how will it affect me?

It’s official. Federal Treasurer Josh Frydenberg has announced that the Australian economy had entered a recession. But what does the term ‘recession’ actually mean? And how will the ongoing downturn affect you and your family? DGI Founder and CEO Dominique Grubisa explains.

What is a recession?

While definitions vary, a recession is commonly regarded as two quarters of negative economic growth – in which rather than growing, the economy contracts.

If you’re an Australian under the age of about 50, then chances are that you’ve gone through your entire working life without experiencing a recession. Since 1991, our economy has experienced more or less steady growth, delivering prosperity and stability to ordinary working people and their families.

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Sadly, that’s all about to change. With the coronavirus pandemic wreaking havoc on economies across the planet, Federal Treasurer Josh Frydenberg announced on June 2 that Australia had entered a period of recession. While definitions vary, a recession is commonly regarded as two quarters of negative economic growth – in which rather than growing, the economy contracts.

In Australia’s case, the economy shrank by 0.3 percent in the March quarter as the early effects of the pandemic were felt. A far bigger fall is expected in the June quarter, with many experts tipping a decline of between five and ten percent. Most are forecasting further negative growth beyond that, with a depression – a severe and prolonged downturn – one of the possibilities.

The news is a major blow to families already suffering from the impacts of the COVID-19 lockdown. To help you navigate the weeks and months ahead, here’s a guide to how the recession is likely to impact on you and your loved ones’ lives in several key areas.

Recession Job Loss

Major job losses were one of the first impacts in Australia of the pandemic. An estimated 600,000 people lost their jobs as sectors including tourism, hospitality and retail were devastated by social distancing restrictions. Unfortunately, recessions tend to create a vicious circle around job losses. As people hear about others losing their jobs, they become concerned about their finances and, as a result, spend less. This means even less money is pumped into the economy, leading to more business failures and more job losses. Our national unemployment rate is expected to hit at least 10 percent in the June quarter.

Wages and Recession Spending Habits

Australia’s economy was already struggling somewhat before the arrival of COVID 19, due to a sluggish retail sector and low wages growth. Consumer spending lies at the very heart of the Australian economy, and less money being handed over at the cash registers of businesses impacts on everyone. A recession will make things far worse. With unemployment soaring, people will be worried about losing their jobs and less likely to ask for pay rises. This will lead to less money in people’s pockets, hurting businesses across the country.

Property Prices During Recession

The property market has so far defied predictions of a COVID-19 slump. Despite, massive layoffs and business closures, property prices have remained relatively stable. But a range of experts, including the major banks, don’t believe the benign conditions will survive the recession. Both the Commonwealth Bank and National Australia Bank have issued predictions of worst-case scenarios where prices fall at least 30 percent. Factors that could bring on a plunge include the withdrawal of the JobKeeper payment in September, banks ending mortgage holidays for customers, and a sudden glut of properties on the market.

Debt Recession

Australia has one of the highest rates of personal debt in the world. In a recession, this is likely to act as a brake on recovery. With so many of us deeply in debt, our priorities are likely to be on servicing our loans (and retaining our house or car), rather than spending elsewhere in the economy. Again, the recession creates a vicious circle that drives down spending and worsens overall economic conditions.

Looking ahead

While almost every Australian is hoping for a speedy return to the way things were before COVID-19, the reality is we face a long path to recovery. The worst of the recession is very likely yet to come, and many more people will face severe economic hardship.

In such times, knowledge is power. By seeking education on the risks and challenges to come – and the associated economic opportunities – you can put yourself in the best possible position to ride out the recession. Through smart investment and asset protection, you may emerge on the other side in a stronger and more sustainable economic position than you are now.

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