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What happens in a recession?

Posted: 4 June 2020 8:42 pm
News

People lined up at different ATMs.

You've heard Australia is in a recession, but what does this actually mean for you and how could it affect your day-to-day finances?

After months (or some would say years) of uncertainty, we're officially heading into a recession in Australia. Technically we're not in a recession just yet, but it's inevitable. A recession occurs when the country reports two quarters in a row of negative growth, measured by our Gross Domestic Product (GDP). The Australian Bureau of Statistics (ABS) has revealed our GDP for the March 2020 quarter shrunk by -0.3%, and it's guaranteed that the June quarter figures will be much worse given the coronavirus-related lockdowns.

But the technicalities of a recession and what defines a recession aren't important, what's important is what this all means for Australians. Australia hasn't been in a recession in three decades, so if you're under the age of 45, you won't have lived through a recession in your working life.

Here's what you can expect to happen in a recession, and some tips on how to prepare now.

Spending will slow down and unemployment will rise.

"Consumers are likely to remain cautious in spending, due to the lingering risk of a second wave of COVID-19 outbreaks and downward pressure on house prices," Chief economist at BetaShares David Bassanese told Finder.

Less consumer spending is bad for the economy. Because more people will be out of a job, people will be spending less on things like cafe and restaurant meals. Then cafes and restaurants will be earning less, so they'll likely need to make job cuts. Then, those staff will be out of a job and spending less. It's a vicious cycle.

More than one million Australians have become unemployed in recent months, and we can expect some more job cuts on the way. There are already around three million people relying on the government's JobKeeper wage subsidy payments to keep their job. When this stimulus package expires (currently it's set to end in October), it's likely we'll see more workers out of a job.

It'll be harder to get a pay rise and there'll be fewer jobs to switch to.

If you're hoping for a big pay rise soon, you'll probably be disappointed. And with fewer jobs available, it's not going to be the best time for a career change or to switch roles with another company either. A lot of companies will have a complete hiring freeze, and the ones that are recruiting might be offering less money as there'll be more competition for the roles.

"All this really depends on the nature of your employment and sector. In general, with business under pressure, it may be hard to expect a decent pay rise and not as easy to find alternate jobs if you flag your intention to leave. Now is not the time to push your luck!" said Bassanese.

If you're unable to get a pay rise, consider increasing your income with a side hustle instead.

Rent and property prices could fall and interest rates will remain low.

If you're renting, you could have the upper hand. "Rents could certainly become cheaper with landlords keen to lock in good tenants," said Bassanese.

Your landlord isn't going to call you up and offer you a discount, you'll need to negotiate this and shop around if they're not willing to budge.

If you've got a mortgage, Bassanese said it's a good time to take advantage of the low interest rates. "Interest rates are likely to stay very low. If you can afford it, now is the time to perhaps keep up payments and get ahead of your mortgage."

With interest rates at record lows and looking to stay that way for a while, it could be a great time to refinance to a cheaper home loan and even make extra repayments if you're able to.

There's also been a lot of talk in the media about property prices falling, which isn't great news if you've got a large mortgage but could be a positive thing for first home buyers. "The upside is that those willing to spend may be able to grab a bargain, and interest rates on debts will remain incredibly low," said Bassanese.

Interestingly, while all signs would point to property prices falling this year, property prices actually rose during the last recession.

There will be some good deals, for those willing and able to spend.

If you're in a stable job with a bit of disposable income you could get yourself some good deals this year. Retailers will be dropping prices to try and entice spending, particularly on imported goods. "The currently high Australian dollar may see further declines in local consumer electronics and household whitegoods imported from overseas," said Bassanese.

You could also get some good deals in the share market. While a falling share market isn't exactly welcome news for those who already have a large portfolio, it presents a great buying opportunity to grab shares at discounted prices.

Now that you have an idea of what to expect in the coming months, it's a good idea to start preparing your finances for a recession.

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