You’ve heard the predictions and you’ve got questions. The biggest one: is everything going to change?
The immediate economic impact of COVID-19 is obvious. Businesses are closing their doors, jobs have been lost and many people are lining up for Government stimulus packages, but it’s not over yet. Pre-COVID-19, some economists were predicting that a recession would hit in the coming years; COVID-19 means that recession will hit harder and sooner than anyone expected. Modern history has seen plenty of recessions and the last recession in Australia was in 1990. Just in case you weren’t savvy to its consequences (or you weren’t alive!), here’s a quick guide to the phenomenon of recession—and the impacts we can expect.
What is a recession?
A recession is a temporary economic slowdown that sees trade (the buying and selling of goods and services) decline. The precursor of that is exactly what we’ve seen during the COVID-19 pandemic; people have already stopped buying and selling in many industries (e.g entertainment, hospitality, personal services). This is what’s behind the government stimulus packages—they want to cushion the blow to these industries and protect them from the impacts of a full scale recession.
Technically, economists define a recession as a reduction in GDP (the total value of all the stuff we buy and sell) over two consecutive financial quarters. The reality is, that might well happen. Australia has had almost 30 years of uninterrupted economic growth. So, as this changes, what can we expect? There’s plenty of (*nerdy*) economic data out there. You can read up on the macroeconomics, political history and sociological impact of recessions, if you want. Right now, though, let’s just talk on a basic practical level. For the everyday person, what could recession mean?
Your personal budget could get a little leaner
Less money in the overall economy means less money in your pocket. In times of recession, people generally spend less week to week. Luxury and lifestyle items generally take a backseat and people start to hold on a little tighter to their pennies. There are a bunch of different reasons for this, some of which we will cover next. But, in simple terms, be prepared for your lifestyle to change a little. This may not be drastic. Australia is a comparatively wealthy country with excellent resources. Education, food and groceries and many of the day-to-day services we enjoy are relatively secure. It will be the luxury items or those we import from overseas which may become less regular purchases.
We might be buying ‘Made in Australia’ more
Unlike a national recession, the COVID-19 recession is likely to be global. In recent decades, our economy and trade have become increasingly tied to the rest of the world. Countries have never depended on each other for the import and export of goods as they do now; we’ve never been so interconnected with other countries economically. COVID-19 and the potential recession to follow may change that. It’s hard to predict what will happen in the long term, but you can expect there to be some changes in the products which are available and the price of those products. With increased restrictions and costs associated with global trade and a weaker Australian dollar we may start to rely more (at least in the short term) on domestic production. This means you could be seeing more ‘Made in Australia’ labels on products which we usually import.
Jobs could be harder to get – and keep
A recession saps money out of businesses and consumers. This has a pretty nasty impact on employees. Customers stop demanding products and businesses have less money to spend on staff. Job security is generally lower in times of recession. This continues the cycle—with unemployed people spending less as consumers. The specific nature of the predicted recession means that some industries will be impacted more than others. Obviously, healthcare and certain technology and service industries will continue to be in demand. It is other industries which could suffer in terms of job availability and security.
However, it is genuinely difficult to know exactly what will happen. And the predictions are no reason to panic. The Australian government is working hard to keep employees connected to their employers with the JobKeeper package. Further, in times of crisis, economies respond in a variety of ways. In fact, did you know that during WWII, America’s economy boomed? The war ended the Great Depression. We’re not in the same situation, but there is reason to hope that the government’s work will help to alleviate some recession impacts.
Debt may become more difficult to manage
As economic activity and employment slows and bank accounts feel the strain, debts can become harder to manage. Mortgages and credit cards which were set during better economic conditions suddenly seem more expensive. The debt might not have changed, but the conditions under which you are paying off the debt have. This might be one area you can at least do some preparation for. If you have a lot of debts or you are worried about debt you may want to seek advice and the Government’s Money Smart website is a great place to start.
How can I prepare?
If recession is coming, what should we be doing now? Here are some action-points to consider:
- Take advantage of the government’s stimulus packages. Whether you’re an employer, an employee or a job-seeker, the packages are designed to keep you afloat through a recession.
- If possible, put some extra effort into paying off debts and building up savings.
- Think about what practical lifestyle changes you can make to lower your budget. From perfecting your roster of cheap recipes to cutting back on subscription services, the small decisions add up.
- Make the most of COVID-19 related savings. Cinemas are shut, overseas holidays are cancelled and we’re all stuck at home. Open a new savings account and fill it with the money which you would usually spend on restricted services and products.
- Be ready to shop local and shop small. As some products become more difficult to find, let’s look for local alternatives. We can support small businesses and fill our cupboards at the same time.
Keep calm and learn from history
A recession is no joke. Australian jobs and spending could be majorly impacted. But, we’ve been here and done this before. Tightening your budget might not be much fun, but it is something you can survive. Let’s be grateful we live somewhere with a government that is working to help those of us hit hardest by these economic changes. History has plenty of lessons to teach us. While you’re cooped up in isolation, why not get reading? Or, call your grandparents. Earlier generations remember what the last recession was like. And they probably have some great tips for getting through it. After all, as we adjust to the new normal and prepare for what is to come, we need each other.
Nothing in this article is intended to be financial, legal or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser. This information relied on sources believed to be reliable and accurate at the time of publication.