Is Australia heading towards a recession?

3 min read

While inflation has fallen, unemployment has risen and some businesses have shut, it's not all bad for Australians. Read about what happens in a recession here.

Whether we’re in a recession or not is just a technicality. The reality is that economies around the world have been severely shocked by the impact of COVID-19 and all Governments have been forced to take rapid and decisive action to future-proof their countries economic stability.

Australia is no different. Inflation remains at historical lows, unemployment has increased and many businesses have closed their doors. But it’s not all bad news…

What is a recession?

A “technical” recession is defined as two consecutive quarters of declining Gross Domestic Product (GDP). However, the National Bureau of Economic Research (the organisation that officially declares recessions), defines recession more broadly – as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales1.

How Australia has avoided recession for nearly three decades

It's well documented that Australia’s last recession was almost 30 years ago, dubbed by then Treasurer Paul Keating as the ’recession we had to have”.

Globally, we are considered ”the lucky country”. Australia has enjoyed this longest uninterrupted period of economic growth, and that’s despite the GFC in 2008. Here’s why.

We have an abundance of natural resources and a boom in the Chinese economy has underpinned ongoing demand for these commodities.

Historically we’ve had low levels of Government debt thanks to the introduction of superannuation in the 1990s. The Government therefore had flexibility to inject money into the economy, enabling consumer spending and stimulating growth when needed.

The Australian dollar is valued by supply and demand, not by the Government or the Reserve Bank of Australia. This floating exchange rate helps us adjust to international shocks as it automatically depreciates, which helps promote exports and less spending on imports.

Australia’s high level of population growth has supported consumption and demand.

What will happen if Australia goes into a recession?

The International Monetary Fund predicts Australia's economy will shrink by 6.7% this year, followed by a V-shaped rebound of 6.1% next year, assuming we reach the peak of the pandemic in the next three months and social distancing restrictions ease in the second half of the year2.

According to the St. George Bank Economics team, the following economic indicators suggest Australia will go into a recession (again assuming infections peak in the next three months).

The range of stimulus measures from the Federal government, Reserve Bank and State and territory governments will help keep viable businesses afloat during the crisis, but they can’t prevent a recession.

Australia will likely experience three consecutive quarters of falls in Australian GDP over the March to September quarters of 2020, before recovery begins in the December quarter.

Unemployment is expected to reach 9% in the June quarter, thankfully muted by the JobKeeper payment, but could peak within the range of 7.8% - 14% over the rest of the year.

Population growth will slow significantly as migration is halted.

In April, the Westpac-Melbourne Institute Index of Consumer Sentiment recorded its single biggest monthly decline in its 47-year history reflecting the large shocks to jobs and spending. Sentiment around housing also collapsed for both assessments of ‘time to buy’ and ‘price expectations’3.

The NAB business survey for March provided further confirmation that COVID-19 is both a medical and economic crisis, with capital expenditure falling below levels experienced during the GFC in February 2009 .

How will we know when the economy is recovering?

Most of today’s workforce don’t remember the recession in 1991, but it cast a long shadow and the effects were felt long after the official data reported the recession was over.

While we’ve avoided recession for a long time, economic growth was languishing well below the potential growth rate of 2.75% and the Australian jobs market was characterised by an unemployment rate above the rate consistent with full employment of 4.5%4.

We’ve teetered on the edge, although few could have predicted this downturn would be the result of deliberate government policy and regulation put in place to control a pandemic – the “recession we chose to have”.

How deep and long this market downturn is will depend on how long the economy remains in lockdown.

Recessions often end when interest rates, wage growth and operating costs fall low enough for investors to decide it's a good time to invest again, and, crucially, when confidence hits a level that encourages investment and spending5.

Treasurer Josh Frydenberg echoes this sentiment, stating Australia has entered this crisis from a position of strength, with relatively low debt and major government spending initiatives including the $130 billion JobKeeper package6.

"Our measures are temporary, targeted and proportionate to the challenge we face and will ensure Australia bounces back stronger on the other side, without undermining the structural integrity of the budget whilst maintaining our commitment to medium-term fiscal sustainability."

This bodes well for our future. We have a Government, supported by the Reserve Bank poised to do whatever it can to rebuild our economy and a population that’s keen to return to a level of normality.

 

1 Investopedia: Guide to economic recession https://www.investopedia.com/terms/r/recession.asp
2 AFR: IMF predicts deep recession, V-shaped rebound https://www.afr.com/policy/economy/imf-predicts-deep-recession-v-shaped-rebound-for-australia-20200414-p54jot
3 Westpac IQ Bulletin, 15 April 2020, Consumer confidence collapses as Coronavirus hits hard
4 Westpac IQ Bulletin, 14 April 2020, Australia: business conditions & confidence, March COVID-19: a medical crisis, a severe economic shock
5 ABC News: As coronavirus drives down the economy, how does it compare to the last recession?https://www.abc.net.au/news/2020-04-15/how-coronavirus-crisis-compares-to-1990s-recession-australia/12148020
6 Economic outlook and forecasts amid COVID-19 (3 April 2020), St. George Economics

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This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 7 May 2020. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. These projections are predictive in character. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by inaccurate assumptions or may not take into account known or unknown risks and uncertainties. The actual results actually achieved may differ materially from these projections. No company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.