Your guide to the 2020 Australian recession
Treasurer Josh Frydenberg has confirmed Australia is in the midst of its first recession in nearly 30 years. Not since Treasurer Paul Keating announced Australia was in a recession in 1990, have we seen anything like the downturn the country is currently experiencing.
The 1990s recession began in the September quarter of 1990. It lasted until the September quarter of 1991, during which time GDP fell by 1.7 per cent, employment by 3.4 per cent and the unemployment rate rose to 10.8 per cent.
To give you an idea of how long ago that was, back in 1990 Bob Hawke was Prime Minister, Germany was reunified, Namibia separated from South Africa as did the Baltic States from the Soviet Union, the Hubble Space Telescope launched and in 1991 Nirvana brought grunge music into the mainstream with the release of Smells Like Teen Spirit.
The COVID-19 induced recession, comes on the back of bleak forecasts for the June quarter, with the latest GDP figures confirming Australia’s economy shrank by 0.3 per cent in the three months to March.
So, what is a recession?
A recession is defined as two consecutive quarters of contraction, otherwise known as negative growth. That is two quarters of declining Gross Domestic Product (GDP).
With the March quarter dipping by 0.3 per cent, and the April to June quarter expected to be “far more severe”, these two consecutive quarters equate to a recession.
“We’ve just notched up a 0.3 per cent decline in the economy in the March quarter – we’re looking at 8.5 per cent in the June quarter,” Mr Frydenberg said.
What is GDP?
Gross domestic product (GDP) is the total monetary or market value of all finished goods and services produced and sold in a country, within a specific time.
Put simply, it is the most commonly used measure of economic activity.
As an equation it looks like this: GDP = private consumption + gross private investment + government investment + government spending + (exports – imports).
By measuring overall domestic production, we then get a comprehensive scorecard of a country’s economic health.
How does Australia’s recession compare to other countries?
While we were expecting the figures to be bad due to the impact of the bushfires, coronavirus made things much worse.
Yet, compared to other countries, Australia’s recession doesn’t seem so bad. China has experienced negative growth of 9.8 per cent, France 5.3 per cent, Germany 2.2 per cent, the UK 2 per cent and the US 1.3 per cent.
But how bad is it?
During the 1990/91 recession, GDP fell by 1.7 per cent, employment by 3.4 per cent and the unemployment rate rose to 10.8 per cent.
Due to COVID-19, the current unemployment rate is 6.8 per cent. It is expected to rise to 10.5 per cent by Q3 2020. Meanwhile, underemployment — those with a job, but who want more working hours — surged by more than 600,000 to 1.8 million people or a record high 13.7 per cent, up nearly 5 per cent in just a month.
Furthermore, fewer jobs may lead to reduced or stagnant wages.
In other words, it’s pretty bad.
Does it affect consumer confidence?
Higher unemployment figures lead to less money being spent within the community. This means less spending on non-essential items such as dining out and holidays.
As the tourism and hospitality industries, along with retail, have already taken a massive COVID-19 hit, the last thing they need is a stunted recovery. Unfortunately, a slower than expected or hoped for recovery could be on the cards and may depend on existing or future Federal stimulus packages.
What else might happen?
Property prices could be affected if the unemployment rate goes beyond 20 per cent. Some analysts are predicting a 20 per cent fall in property value if this is the case. The good news is we are yet to see any substantial fall in property prices and with low interest rates and further stimulus packages expected to prop up the property industry, it is unlikely to fall this hard.
Household debt could increase as the pandemic drags on, which will affect the broader economy. The real debt test will come when banks and service providers such as utilities lift their consumer support packages.
Is there a light at the end of the tunnel?
“The fact that the Australian economy only contracted by 0.3 per cent shows the Australian economy’s remarkable resilience,” Frydenberg said.
So, at this stage, the answer is yes, there is a light.
The economy is beginning to re-open and consumer confidence is up (albeit slightly). However, it is during the next quarter that we will know the full impact.
This update is not financial advice. This article is general news and information.
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