What is a recession, and how can you prepare?

Key Points:

• A recession is a sustained period of low economic output.
• High unemployment is one of the most important warning signs of an impending recession.
• Recessions can last for a few months to a few years.

Aussies have been doing it tough. After weathering a year of high inflation, stubbornly elevated interest rates, and relentless cost-of-living pressures, many households are still feeling the financial squeeze. While inflation has eased slightly and the Reserve Bank of Australia (RBA) delivered its first rate cut in four years, the economic outlook remains shaky.

Now, a fresh warning is emerging from economists: a potential recession could be brewing.

But what exactly does this mean? And how can we prepare?

What is the definition of a recession?

The RBA notes that while there’s no single definition, a recession typically involves weak economic output and rising unemployment. Key characteristics include:

• Sustained weak or negative growth in real GDP
• Declines in household spending and business investment
• Higher rates of loan defaults and business closures
• A significant increase in the unemployment rate

Because these indicators are typically present when unemployment is increasing, the RBA views the unemployment rate as a reliable indicator to determine whether there’s a recession because it reflects multiple forms of economic stress.

You might also have heard the term, ‘technical recession’. This phrase often appears in textbooks and is widely used by journalists. It’s typically defined by two consecutive quarters of negative real Gross Domestic Product (GDP) growth.

However, weak GDP growth (even if not negative) can still cause hardship; GDP data is volatile and often revised, which can give misleading signals; and a technical recession doesn’t consider GDP per capita or exclude volatile sectors like agriculture.

What happens in a recession?

Recessions can last for a few months to a few years. This sustained period of slow economic output often puts financial stress on both a country and its citizens.

The classic symptoms and consequences of a recession include:

• Drops in household spending
• Significant job loss
• Decreasing business investment
• Company shutdowns
• Rising loan default rates as people and businesses struggle to repay debt

Image: RBA - Recession Explainer

Examples of prior recessions in Australia

• COVID-19 aftermath recession (March - June 2020)
• The Global Financial Crisis (GFC) (2007 - 2009)
• Early Nineties Recession (1991 - 1992)
• OPEC Oil Embargo (1973 - 1975)

What causes a recession? And is a recession coming?

Recessions rarely have a single cause. Often, multiple factors converge into a perfect storm that drags the economy down. Common causes include:

• High interest rates	• Rising unemployment
• Low consumer confidence	• Unchecked inflation
• Stagnant or falling wages	• Asset bubbles (e.g. the housing bubble before the GFC)
• Mounting household debt	• Stock market crashes
• Supply-chain disruptions	• Global shocks like pandemics, wars, or trade embargoes

Australia's job market remains resilient for now. Employment is one of the most reliable indicators: when jobs go, so does spending. So long as employment holds, there's hope.

That said, recessions are often only recognised in hindsight. Causes and effects often blur. Economists and historians often debate where the true triggers lie.

Ultimately, recessions are a natural part of the economic cycle. It’s not a matter of if – just when.

Recession vs depression – what’s the difference?

The difference between a recession and depression is severity. While recessions are sustained periods of negative growth, depressions crash harder for longer. The classic example is the Great Depression of the 1930s, which put millions out of a job and lasted the better part of a decade.

What could a recession mean for Australia?

If Australia slips into recession, many households will feel the pinch – but not all equally.

Job losses could rise, mortgage stress may worsen, and consumer spending would likely fall. Businesses already under pressure might collapse, especially in retail and construction.

The RBA may be inclined to cut interest rates to spark growth, and the government may roll out targeted support. In the face of a global recession, with worldwide growth slowing and key trading partners also in recession, external pressures could add to local pain.

Recessions hit harder for some than others. Vulnerable groups face the biggest risks – including mental health impacts and increased mortality linked to unemployment.

Still, there may be upsides:

• House prices could drop, potentially assisting first-home buyers
• Inflation may ease
• Long-term investors could snap up bargains

A downturn is hard to avoid – but being prepared can make all the difference.

How to protect yourself from a recession

While you can’t control the economy, you can take steps to protect your finances. Here’s how to build your personal recession shield:

1. Build your emergency savings: Aim for a safety net that covers at least 3 months of living expenses. Compare high-interest savings accounts to maximise your buffer.

2. Cut debt, not corners: It might be a sensible time to reduce credit card balances and avoid new debt. Make extra repayments where you can – particularly on variable home loans, which are still expensive despite the RBA’s recent cut.

3. Keep your credit score healthy: If you’re struggling with repayments, talk to your lender early. Australia’s hardship laws now offer more protection, but proactive communication is key. Learn how to improve your credit score.

4. Diversify your income: A side hustle, freelance gig, or even selling unused items could help tide you over if hours are cut or jobs are lost.

5. Invest wisely: This isn’t the time for high-risk plays. Focus on diversification and long-term value over short-term gains.

Being financially prepared won’t stop a recession – but it can help you ride it out with confidence. When the pressure mounts, being proactive beats panicking every time.