There has been a lot of talk in the media this month about our “official recession”, following the release of the Australian Bureau of Statistics’ (ABS) latest economic figures. So, let’s break down what that actually means, where we are and where we are headed.

What is a recession?

Technically, a recession occurs when we see two consecutive quarters of negative GDP growth. Often in a recession, businesses produce less, so they have to let employees go. As unemployment rises, people start spending less and the economic output for the country goes down. Given the bushfires and the pandemic, it isn’t at all surprising that we are now in a technical recession.

What are the latest economic figures?

  1. Australia’s GDP fell by 0.3% between January and March and by a massive 7% from April to June (see graph 1).1
  2. Household consumption fell by 12.1%.
  3. Unemployment has risen to 7.5% and youth unemployment (18 –24 year olds) is at 16.4%. Underemployment is also significantly higher.2
  4. The official cash rate dropped to 0.25% in March, driving interest rates to record lows.

How does this recession compare to the previous recession?

The last recession in early 1990 followed a period of excess, speculation and overspending. It occurred as central banks pushed interest rates to a record 17% to curb inflation.3 Unemployment rose to almost 11% in 1992. House prices crashed as very high interest rates, combined with people losing their jobs, meant high numbers of distressed sales. It took almost a decade for unemployment to return to 6%.

The current recession is quite different and we shouldn’t expect it to play out the same way. This recession was preceded by low inflation, low interest rates, low wages growth, low productivity and low economic growth. It is a downturn instigated by government restrictions designed to protect as many Australians as possible from COVID-19.

What can we expect for the rest of 2020 and beyond?

Unlike the 1990s, the RBA expects GDP and unemployment will return to previous levels within one to three years.4 While unemployment may still rise to at least 10% as JobKeeper is wound back, economists are forecasting GDP will start to expand from the third quarter of 2020.

Additionally, it is not expected house prices will ‘crash’. First, record low interest rates put much less pressure on homeowners struggling to repay their mortgage. Second, banks are being incredibly supportive, offering deferral periods for mortgage holders affected by job loss and personalised help for all customers in managing their loan within their means. Third, recent government stimulus measures, such as the first home loan deposit scheme (FHLDS) and the HomeBuilder grant, are supporting demand for housing and construction.

As mortgage deferrals come to an end between September 2020 and March 2021, there may be a number of Australians who can no longer afford their home and will have to sell. While this could put some downwards pressure on house prices, distressed sales should remain at a minimum.

Typically, a recession ends when interest rates, wage rates and operating costs fall so low that businesses and investors start borrowing and spending again, and employers start hiring. The RBA has signalled it will keep the cash rate at the record low levels for several years, which bodes very well for investment. In addition, wages are now growing at their slowest pace in 22 years, which helps reduce costs for businesses.5

The pandemic and the economy

Of course, recovery from this particular recession requires managing an extra hurdle – COVID-19. When and how quickly our economy recovers is inextricably linked to case numbers of the virus and government decisions around restrictions. If and when we see a successful COVID-19 vaccine, and how long it will take to implement, also plays an important role in our economic recovery. Economic forecasters suggest a vaccine would see Australia experience a V-shaped recovery (i.e. a fairly quick rebound).6 It would likely mean the end of lockdowns, and boost business and consumer confidence, employment, wages and spending. However, the RBA has indicated it may be at least another 12 months before we see significant recovery to the economy, even with a vaccine.

Why we are the lucky country

Case numbers of the virus from almost every other continent has given Australians a reason to feel lucky to live here. Our economic results should reinforce this sentiment. Only four other countries – South Korea, Finland, Denmark and China – reported a smaller economic downturn in the June quarter than Australia, and only China reported a positive quarter.7

Government stimulus measures and support from our financial institutions have been significant contributors to our comparative success.7 They have helped to prop up both businesses and individual households and limit the economic fallout from the pandemic.

Banks are also doing an admirable job in helping struggling mortgage holders keep their homes, which is keeping the property market afloat. Banks are focussing on managing risk, and they still have the financial means to be able to help borrowers through this difficult period.

We are also fortunate that our economy isn’t held together by one or two industries. Parts of our economy are not being seriously affected by the virus, including mining and government employment. The majority of well-paid, white-collar professionals have escaped job losses so far. There are also many opportunities for businesses to grow and adapt to the new lifestyle changes we are seeing, particularly those in health and cleaning supplies, manufacturing, online educational, and work services and delivery services.8

Even if we don’t successfully produce a vaccine for COVID-19, the federal government’s “aggressive suppression” strategy appears to be working relatively well (despite problems in Victoria). The sophisticated tracking systems we have in place mean that most parts of the economy are open for business and virus outbreaks are being dealt with swiftly and effectively.

And where they can be, many Australians are being sensible. Households are preparing themselves for this recession, saving a massive 20% of their disposable income (on average), more than a 200% increase on what we usually save (around 6%).9 This will help to build a financial buffer for those of us who stand to be affected by job losses over the next 12 months.

Australians would do well to keep saving their disposable income, keep following government recommendations to reduce cases of the virus, and seek financial help from their lender, broker or financial adviser as required. With any luck, several years from now, the events of 2020 will be a distant memory.

 

SOURCES: 1https://www.afr.com/policy/economy/australia-s-recession-in-five-graphs-20200902-p55rkw, 2https://www.abs.gov.au/ausstats/abs@.nsf/7d12b0f6763c78caca257061001cc588/a8e6e58c3550090eca2582ce00152250!OpenDocument, 3https://www.abc.net.au/news/2020-04-15/how-coronavirus-crisis-compares-to-1990s-recession-australia/12148020, 4https://www.rba.gov.au/publications/smp/2020/aug/economic-outlook.html, 5https://www.abc.net.au/news/2020-08-12/consumer-confidence-and-wage-price-index/12548970, 6https://www.afr.com/policy/economy/vaccine-key-to-v-shaped-recovery-20200810-p55k58, 7https://www.afr.com/policy/economy/just-three-countries-fared-better-than-australia-20200902-p55rly, 8https://www.businessaustralia.com/how-we-help/be-a-better-employer/getting-legal-advice/employer-guide-to-coronavirus/9-industries-likely-to-thrive-as-a-result-of-covid-19, 9https://tradingeconomics.com/australia/personal-savings