A look at what a recession is, what you need to know and how to best prepare in advance.
Given there’s quite a bit of talk around fears of a global recession, now might be a good time to look a little deeper at what it is, what it might mean and how you can best prepare in advance.
Is a recession likely?
Certainly many of the recession markers, both in Australia and globally, are beginning to emerge such as rising inflation which of course triggers central banks to raise interest rates in an effort to slow inflation. Add to that the supply chain interruptions happening globally and labour market pressures (not enough work force or higher unemployment) and it starts to look like we’re heading in the direction of a recession.
Many of us already know what a recession feels like, but let’s look at a basic working definition.
What is a recession?
Somewhat unhelpfully, there is no single definition of a recession. However, there are some features that tend to show up when recessions hit. The Reserve Bank of Australia (RBA) loosely defines a recession as a sustained period of weak or negative growth in real GDP (gross domestic output) that is also accompanied by a significant rise in the unemployment rate. It’s often accompanied by low household and business spending – ie: Aussies tighten their belts.
A ‘technical recession’ is usually called by the media when GDP hits two or more quarters of negative growth in GDP. Which may or may not indicate a ‘real’ recession depending on what else is going on.
For those of you who remember the 90’s ‘recession we had to have’, you know how devastating a real and prolonged recession can be. Even in the global financial crisis, where Australia narrowly dodged the kind of recession so much of the rest of the world experienced, thanks to significant government spending to keep household spending afloat, there were still many who did it tougher than they may have liked.
Can’t the government just spend us out of a recession like they did in the GFC?
The difference between then and now, is that back in 2008-09, the government had significant surplus funds to draw on. Whereas now, thanks to the government’s Covid stimulus measures, the surplus is now no longer.
I’m not saying previous government stimulus was a bad thing, rather that previous level of government spending has taken the coffers from surplus to now deficit and that will change the landscape for the economic environment (and the likelihood of stimulus) moving forward. And it will also change what the government can and can’t, or rather is prepared to access moving forward.
But we don’t have an unemployment problem, do we?
At this point you might be asking how can we be talking about rising unemployment, when the media are constantly telling us almost all employers are desperate to find the workers they need. My take on this is that unless businesses can ultimately find the staff they need to run their businesses efficiently, it will act as a brake on GDP growth across the country in the same way that unemployment limits household spending. Neither are good if prolonged.
Plus, if business learns to do without adequate staff over time because they just can’t find any, they will likely find different ways to move forward using AI, robots, automation, outsourcing, etc. If that allows them to still fulfil on their business’ promise, that will ultimately limit the number of jobs available in the longer term.
Surely it’s not as bad as you’re making out?
Let’s not forget, as a nation, Australia has had an incredibly robust economy since 2009 and really since the mid-90s before that. So for anyone that mostly cruised through the GFC (and a lot of people did) and weren’t overly affected financially by Covid as a lot of people weren’t, that amounts to quite a lot of people have no real experience of extended downturns.
Unlike Australia’s experience of the GFC, which was relatively short, Australia’s previous recessions, in the 70s, 80s and 90s lasted for up to and beyond five years and unemployment sat around 5.5-7%.
However, should a global recession occur where many economies are plunged into recession as happened in the 1890s or 1930s (aka a depression where unemployment hit 14% by the five year mark and both lasted for in excess of 10 years), then that’s an economic shock that will pay considerable dividends to be prepared for.
Although that might all feel scary, governments across the world, including Australia’s are considerably better prepared to manage and withstand significant financial shocks.
What can you do to prepare?
Doom and gloom aside, there are things you can do to build a buffer so that you can withstand what the economy (and life) might throw at you from a number of angles.
Safety nets you can think about applying now;
- Building a strong new business development pipeline for your business
- Build better business and personal budgets. Start by checking your business and personal costs now. Trim what you really don’t need.
- Create a personal emergency fund equivalent to six months of your living expenses
- Getting life, trauma/disability and income protection insurances in place – whilst these aren’t necessarily recession related, it’s more life-planning related, and random events can and do happen (often when you least expect it).
Whilst we’ll cover some of these in greater depth in coming weeks, forewarned is forearmed against future economic shocks – however they come about. And even if those economic shocks never arrive, creating a buffer (aka having some financial safety nets) in place, can just make life less angst inducing.
Of course, if we can help you better manage your business planning and tax affairs, you can call us on 6023 1700 or connect with us via Facebook or LinkedIn.
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