01 Oct A Recession In The Lucky Country

The talk in the media of late is that we are in an “OFFICIAL RECESSION ” based on the latest economic data. Given the bushfires and the Covid 19 pandemic, it isn’t all that surprising that we are now in a technical recession.

What are the latest economic figures –

• Australia’s Gross Domestic Product (GDP) fell by 0.3% between January and March and then by a much larger 7% from April to June.
• Household consumption fell by 12.1%.
• Unemployment has risen to 7.50% and youth unemployment is at 16.40%.
• The official cash rate dropped to 0.25% in March,an historical low.

How does this recession compare to previous recessions ?

We had the recession we had to have in early 1990. This followed a period of excess, entrepreneurial speculation, overspending and reckless lending . At the time,Central Banks increased interest rates to record highs of 17% to curb inflation. In 1992 unemployment had risen to almost 11%. Due to high interest rates and unemployment house prices crashed because of the number of forced sales.

What can we expect for the future ?

Unlike previous recessions the Reserve Bank expects unemployment and GDP will return to pre-recession levels within one to three years. It is not expected house prices will “crash”. With record low interest rates and bank support with payment deferrals, this has alleviated pressure on homeowners struggling to pay their mortgages and other commitments.

Normally a recession ends when interest rates, wages and operating costs reduce to the point that business and investors start borrowing again and employers start hiring. The Reserve Bank has indicated it will keep the cash rate at the current low level for several years. This coupled with slow wage growth will help reduce the costs of business.

Why we are the lucky country –

Case numbers of the Covid 19 virus from almost every other continent has given Australians a reason to feel lucky about where we live. 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.

We entered these times on a strong economic base. This assisted with Government stimulus and assistance from financial institutions have helped greatly with our success in riding out these difficult times.