The Coronavirus pandemic has had a costly impact on world economies – one that has pushed individual countries, including Australia, into recession. But what does this all mean? After spending months in lockdown to curb Coronavirus, many countries have been able to assess the impacts on their economies – a cost shock that has led some nations, including Australia, into recession. This may sound concerning, but as the Investments team explains, expansion and contraction in an economy is normal – meaning recessions form part of a regular economic cycle.
In Australia, a recession is often defined as two consecutive quarters (or six months) of contraction – that is, a significant decline in economic activity.
However, two quarters of contraction alone is not always enough to determine a recession; a number of key indicators may also be considered before a recession is declared, such as increased unemployment, decreased business and consumer spending, financial market volatility, and lower gross domestic product output (referred to as GDP – a leading economic indicator that measures the sum value of all goods and services in an economy).
There are many factors that can cause a recession – such as a crash in financial markets, falling house prices and sales, a significant rise in interest rates, or a shocking “black swan” event (for example, a pandemic), but they generally fall within three categories:
Disruptions to (or even an oversupply of) money from central banks and financial institutions can lead to increased financial risk in an economy. For example, the Global Financial Crisis in 2008 occurred partially as a result of an oversupply of money in the United States – with a house price crash resulting from “cheap money” that was made too easily accessible to people who couldn’t really afford to pay more than interest-only loans.
Confidence is psychological, but it can have a real impact on an economy. If the outlook that market participants (like consumers, investors, economists and businesses) have for economic conditions is poor, this could have flow-on effects to the economy. For example, if the unemployment rate is slated to rise, this could lead to a loss of confidence from consumers and result in decreased household spending in an economy.
Changes to economic fundamentals in one part of an economy can have flow-on effects to others – for example, disruptions to supply chains, which can have material impacts on businesses. Real changes can also be linked to financial factors (above).
For example, central banks’ interest rate changes can influence the operating environment of financial markets, cash flow for businesses, and consumption decisions.
When an economy is in a recession, several interconnected issues may play out at once:
The likelihood of recession in some of the world’s largest economies is also very high. In the United States, for example, first quarter GDP decreased 1.3% (down 5% at an annual rate in contrast to an increase of 2.1% in the fourth quarter of 2019), while unemployment reached 14.7% in April (up from 3.5% in February, before the pandemic), figures that could worsen by year’s end.
Because of its contagious nature, Coronavirus led to social-distancing and lockdown measures that shut down much of the world’s economy, including Australia’s – and this has had an impact on Australian life. So, is Australia experiencing a recession? Based on the technical definition of two consecutive quarters, as well as government confirmation, yes – Australia is in a recession. Data from the Australian Bureau of Statistics has provided more insight into the state of the economy:
It’s natural to feel concern about a recession, particularly when it comes to one’s financial wellbeing. But while the Australian economy has been impacted by the pandemic, it can be helpful to remember that as with any cycle, conditions fluctuate over time.
And according to the RBA, Australia has fared better compared to some other countries – for example, the UK contracted 20% while the US contracted 10% over the June quarter. While the Australian economy is experiencing its biggest economic contraction since the 1930s, the RBA believes the downturn is not as severe as previously anticipated. With a gradual – albeit uneven – recovery underway across most of the country, the RBA’s future outlook suggests:
The depth of this recession and the speed of an economic recovery are uncertain at this time – and this could continue to be the case until a vaccine is developed and distributed. But it may be helpful to remember that although Australia is not out of the woods, the country’s last recession lasted less than two financial years (1990–1991) – followed by nearly 30 years of economic growth thereafter.
No matter the circumstance, Colonial First State remains dedicated to supporting members – regularly sharing market updates and helpful resources to assist members on their financial journey. Article taken from the Colonial First State Website
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