Australia in Recession: What to Expect

The year 2020 is a rough period for Australia. After nearly three decades of steady economic growth, the country has, unfortunately, succumbed into recession after battling a series of massive bushfires followed by the coronavirus pandemic.

This was officially announced by Federal Treasurer Josh Frydenberg on June 2, while Aussies continue to take the onslaught of the pandemic. This has brought worry for many citizens across the country, considering that most people of working age have never gone through their adult life experiencing such a national crisis.

What is a recession anyway and why does it bring uncertainty to both the Government and the general public?

Recession means…

The economy contracts rather than grow or expand. It is typically associated with a significant rise in the unemployment rate. Businesses are cutting down expenses by reducing production and workforce costs. Meanwhile, most people are spending less because their income is way down and they have less money to spend.

Technically, a country is considered in a recession when it experiences two-quarters of negative economic growth.

The country’s economic growth is measured by its gross domestic product (GDP), which is the value created by the goods and services it has produced from business investment and inventories, household consumption, net exports, and government spending. When businesses close down or layoff many of its workers, the GDP significantly decreases.

Recession in Australia

The country’s economy started shaking when it shrank by 0.3 per cent in the first quarter of January to March (largest drop since records began in 1959) when the effects of the deadly bushfires and the early onset of the pandemic were felt. In the second quarter of 2020, it hit a record low of -7 per cent. This was Oz's first back-to-back quarterly declines since 1991.

With the country experiencing two straight quarters of GDP contraction, Australia has entered its first technical recession.

Effects of Recession

Many Australians have already felt the impact of the recession.

Unemployment

As businesses are forced to cut down costs, many workers are laid off. Finding new employment is also challenging as many companies have ceased hiring and expanding while there are plenty of job applicants to compete with.

Less Income

Aside from laying off employees, many businesses have also reduced the working hours of their staff. This would mean fewer earnings for the affected workers. Meanwhile, many unemployed workers have to get a part-time job or side hustle, earning income but hardly enough like what they used to have.

Less Spending

With less income to receive and concerns over an uncertain future, many people refrain from spending beyond the necessities. In the same way, businesses are also cutting down on their expenditures, from supplies, repairs and maintenance, marketing and sales initiatives, and various other expenses.

Debt Holiday

Many lending companies have provided mortgage repayment holidays for their active borrowers. This means that the borrower can take a break from repayments during the holiday period. While beneficial for those who have lost their job or have been ill, the borrower could also end up paying more in the long run because even on the holiday period, the interest on their debt still accumulates.

Low Interest Rates

While the recession brings uncertainty to everyone in the country, the lending sector usually provides low interest rates on various loan products. This is because the central banks use their policy settings to influence interest rates to encourage more lending, which in turn spurs spending and business investment.

The Reserve Bank of Australia, in particular, has kept interest rates historically low since the first quarter.

Planning Amid the Uncertainty

While many economists believed that the worst of the hit to GDP has passed in the second quarter, the economic downturn could worsen in the next quarters as Victoria struggles with the second wave of coronavirus in Melbourne and undergoes harsher restrictions.

One thing is certain, though: The impacts of the recession will not immediately subside as GDP growth resumes. The unemployment rate will likely remain high as RBA has forecasted it to rise to 10 per cent later in the year. More businesses are also likely to shut down as the government cuts the JobKeeper wage subsidy.

During these tough times, Aussies should prepare for the challenges to come with smart investment and asset protection, as well as by identifying the economic opportunities that can be exploited. These are the best ways to emerge from the ongoing crisis in a more sustainable economic position.