Australia has gone into recession for the first time in 28 years. What effect could it have on you?
Australia has had a very good run when it comes to continued economic growth. Twenty-eight years without a recession is a record achievement, with the previous one in 1991. So what is a recession, and what does it mean for you?
What is it?
The Reserve Bank of Australia has two different definitions of what a recession is. The first is a more general one:
A recession can be defined as a sustained period of weak or negative growth… that is accompanied by a significant rise in the unemployment rate. Many other indicators of economic activity are also weak during a recession. For instance, levels of household spending and investment by businesses are usually low.
A more technical definition is when there have been two consecutive quarters of negative growth.
The 7 percent drop in growth in the June quarter is Australia’s largest drop since we began recording data in 1959. But compared to other countries we are still in a better place. The UK and New Zealand have recorded more than 20 percent drops, while the USA’s economy has contracted by 9.1 percent. Hopefully, this means our economy can turn around faster than most.
What’s more important than these financial definitions and figures, however, is understanding the human cost – the real day-to-day effect it has on our lives. A recession means that people lose jobs and pay drops – and that really hurts.
One of the key impacts of a recession is the rise in unemployment and the long time it takes for people to get back into the workforce. Many have lost their jobs during the current crisis and others are relying on the Government’s JobKeeper payments to keep their incomes going.
A financial hit like this, and the hardship it creates, have a massive toll on people’s physical and mental health. The stress and misery of losing a job, and possibly losing your house, as a result, is extremely difficult and we should all look out for our family, friends, and colleagues if they’ve recently become unemployed.
Even before the pandemic hit, more than three million Australians were living below the poverty line. The Government support through JobKeeper and JobSeeker have helped some get out of it, but only temporarily. When the support stops, it’s predicted that more people will be living in poverty than ever before.
Pay rates slip
Another key feature of a recession is that salaries don’t go up. Right now, many people have reduced hours or taken pay cuts and it will become much harder to get a pay rise. This can obviously make it harder to pay an ongoing debt, like a home loan, if you had planned for the usual continued growth in wages.
Is there any good news?
During this pandemic, people have been preparing for what may come. We’re not talking about hoarding toilet paper. Credit cards are being paid off faster, and people are putting more into their mortgages.
It’s a recession like no other, and so things are changing in ways that are anything but typical. As lockdowns ease across the country, we are seeing some positive signs.
Firstly, many people in industries that were affected by the shutdowns are now getting back to work. Canstar, one of Australia’s leading economic research agencies, reports that retail spending is growing at the fastest annual rate for 19 years. And house prices are rising in many regions.
What about the property market?
Melbourne has experienced a slump in property prices but, if you’re lucky enough to be in a region that is relatively free of the virus, the market is probably reasonably healthy. Some places are even experiencing record-high home prices. Not what you’d typically associate with a recession.
Less than a year ago, when the pandemic started to take its grip on the world, it would be impossible to predict what it would be like right now. Now we are in a recession, and the path to recovery is still a big unknown, it’s never been more necessary to do a financial health check to get your finances and home loan in order.
Interest rates are at a historical low, and most believe they’ll stay there for some time. They could even drop further. This means there are home loan products and options out there that could better protect you for whatever happens next. Protecting your savings and minimising debt is essential. And finding a loan that has inbuilt flexibility could be just what you’re looking for to help navigate the next couple of years.
As a mortgage broker, we’re best placed to help you manage your mortgage in this recession. Please get in touch to talk about what you can do to be prepared for whatever happens next. Because the one thing we can be sure of is that this recession will end. They always do.