What does being in a recession mean and how does it affect me?
A few years ago, if the term “recession” was bandied around, it would’ve likely been in reference to Australia’s nearly three-decade run without one.
But that’s changed this year, after the horror summer of bushfires was followed by the coronavirus pandemic.
So now we’re officially in one, let’s answer a few quick questions about recessions.
What is a recession?
A recession is a period when an economy is contracting rather than expanding, and is typically characterised by a significant rise in the unemployment rate.
People spend less, businesses are firing instead of hiring and economic output falls.
Australia’s economic growth is usually measured by looking at its gross domestic product (GDP), which is the value created by the goods and services produced within the country.
That includes net exports, household consumption, government spending, business investment and inventories.
During a recession, that value decreases for a period of time, as businesses cut workers and output or close down altogether.
The definition of a “technical recession” is two consecutive quarters of negative GDP growth.
There are other measures economists may look at, including GDP per capita, which strips out the boost from population growth.
You may have heard discussion of a “per capita recession” early last year, after output per person went backwards for two straight quarters in late 2018.
We’ve been talking about a recession for months — why is it now ‘official’?
The figures released by the Bureau of Statistics are backward-looking, so those released in June were for the January through March quarter.
Those first-quarter figures showed Australia’s GDP had fallen by 0.3 per cent compared to the previous quarter.
Given the initial restrictions to curb the spread of coronavirus were mostly introduced in late-March, that meant the economy was already going backwards before the full brunt of the pandemic was felt.
As a result, it was obvious that the economic hit would be even bigger across the second quarter (April, May and June).
Wednesday’s official GDP figures confirm what was already known, and already acknowledged by the Treasurer: that Australia has experienced two straight quarters of GDP contraction and entered its first technical recession since the 1990s.
While Wednesday’s numbers tick a box on a statistical milestone, they won’t come as any surprise to the more than 1 million Australians who are out of work, and don’t reflect the economic hit from the second round of restrictions in Victoria.
What’s new in the numbers?
The figures reveal the magnitude of the fall in GDP — the economy went backwards by 7 per cent in the second quarter.
That’s the worst fall on record and a slightly bigger contraction than most economists had forecast.
The numbers also show people tightening the purse strings, with households saving nearly 20 per cent of their disposable income, compared to 6 per cent in the first quarter.
COVID-19 subsidies provided by the Government to businesses reached $52 billion in the quarter, with $31 billion of that coming from JobKeeper.
JobKeeper accounted for nearly half of all compensation paid to employees in the arts and recreation, and accommodation and food services industries.
And for the first time since 1959, workers took home less than half of the national income.
Are we past the worst of it?
As with almost everything during the pandemic, that’s uncertain.
However, most economists are forecasting that the worst of the hit to GDP has passed in the second quarter.
The second wave of coronavirus in Melbourne and the harsher restrictions that followed will have an impact on third-quarter GDP.
But economists at ANZ, for example, expect the reopening in other states to have offset that, and are forecasting a modest expansion in GDP over the third quarter (July, August and September).
The reality of the recession, however, will not suddenly abate as GDP growth resumes.
Unemployment will remain elevated, with the Reserve Bank expecting it to rise to 10 per cent later in the year.
And as the JobKeeper wage subsidy is wound back, more businesses are likely to shut their doors, with a Bureau of Statistics survey finding that nearly a quarter of businesses currently receiving coronavirus support expect to close once the support is withdrawn.
What does it mean for me?
You may already be feeling the impact of living through this recession — whether you’ve lost your job, taken a pay cut, put your mortgage repayments on hold or decided to rein in your spending.
Finding a job during a recession can be tough, as more people are on the hunt for work and with many businesses not expanding or hiring during the downturn.
If you’ve lost your job or had your hours or pay cut, you probably aren’t spending as much. Certain businesses will feel the impact of that through reduced sales of goods and services.
For younger Australians, it’s going to be a particularly tough jobs market, if history is anything to go by.
In the last recession during the 1990s, youth unemployment peaked above 20 per cent, compared to 11.2 per cent for the general unemployment rate.
And if you’ve kept your job, you’re unlikely to be getting a pay rise anytime soon, with wages growing at their slowest pace in 22 years.
What happens to interest rates during a recession?
Interest rates reflect the supply and demand for credit and you’d expect there to be less willingness to lend money against an uncertain economic backdrop.
But that’s where central banks come in — they can use their policy settings to influence interest rates and encourage more lending, to spur spending and business investment.
During the last recession in the 1990s, the Reserve Bank reduced its official cash rate target from above 17 per cent to below 5 per cent over the course of three and half years.
This time around, interest rates were already very low.
In March, the RBA cut rates twice, to a record low 0.25 per cent.
And the cost of borrowing money will remain historically low, with the RBA signalling it will keep interest rates at their current level for several years to come.