Recession 2020: What it means for the economy and your finances
In June, Treasurer Josh Frydenberg announced that Australia had officially entered a recession due to the Covid-19 pandemic, making it the country’s first in almost thirty years.
Our guide below can help you understand what happens to a country during a recession and importantly, what it means for your wallet.
What is a recession?
The Oxford Dictionary defines a recession as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in the gross domestic product (GDP) in two successive quarters.”
Broken down into simpler terms, a recession refers to a massive decrease in spending, import and export among industries and businesses over two economic quarters.
What contributes to a recession?
With Covid-19 hitting Aussie shores in late January 2020 and lockdown officially commencing in March, the nation was forced to adjust to a new way of living. The changes occurred both at work and with our managing of normal daily tasks. Unfortunately, this massive shift has played a major role in contributing to a recession.
While there are many factors that may induce a recession, some of the main contributors the country has seen include:
Growth in unemployment figures: In May, Prime Minister Scott Morrison said that the unemployment rate in Australia had lifted from 5.2% to 6.2% in just a month. To put that into perspective, nearly 600,000 Aussies became unemployed, with the total hours worked falling by more than 9% between March and April.
A drop in consumer spending: With many retail stores forced to temporarily close and climbing unemployment figures, many households are cutting back on their regular spending.
Households choosing to save more: On that same note, during these tough times households may also be storing money in their savings account to prepare for the future.
What does a recession mean for the average Aussie worker?
While Covid-19 has seen many Aussies lose their jobs or have their hours reduced, some have been fortunate to be in industries that have kept ticking along. This has allowed them to maintain their working arrangements and stay busy. In fact, many businesses and organisations have put in the extra work to stay afloat.
All the focus on work has meant there has typically been little wiggle room for career progression. If you were hoping to receive a pay rise or promotion this year, it may be difficult to get this over the line in 2020.
Plus, changing jobs could be more difficult now, especially with lower volumes of available roles. In fact, data from the Australian Bureau of Statistics (ABS) show that job vacancies fell by 43% between February and May.
How are businesses impacted by a recession?
A recession is also bad news for businesses. Since Covid-19 began, small businesses have had to either shut their doors, reduce working hours of their employees or let them go altogether. This leads to reduced profits, an inability to pay suppliers or keep up with other expenses, like their energy bill, and having to resort to applying for government benefits
Earlier in May, Mozo reported on the Federal Government’s Covid-19 stimulus package for small businesses, which included more than $17.6 billion worth of subsidies and tax breaks. This was shortly followed by a second $130 billion initiative called the JobKeeper scheme.
Other forms of assistance included banks offering business loan repayment relief and energy retailers providing delayed billing or credits.
Are there any benefits to a recession?
While it might seem that a recession is all doom and gloom for the economy, there are some small benefits. For example, according to Domain, the median rent price fell by 6.4%, while almost a third of rental properties in Sydney have been discounted since lockdown began.
Some other positives include:
Lower home loan rates - From March until now, almost all home loan lenders in the Mozo database have cut rates on their products. In fact, more than 60 providers have variable home loans that start with a ‘2’. So if you’ve been thinking about refinancing, now could be the time.
Reduced credit card fees - Credit cards are another area that get the chop, whether that’s reduced purchase rates, extended balance transfer periods or lowered annual fees. This could be ideal if you’ve been thinking about switching credit cards or blasting debt.
Lower share costs - During a recession share prices decrease, so now might be your opportunity to try your hand at the stock market - with the right professional advice, of course.
More retail sales - Once retail stores slowly begin to open again, they may launch with some competitive sales. So, if you’ve been holding out to pick up a new TV or sound system, you could be on your way to bagging yourself a bargain.
How can I prepare my finances for the future?
Since there’s no telling how much longer the country will remain in a recession, it could be a good opportunity to get your finances in shape. For instance, you might want to work on saving more money by switching to a high interest savings account or building an emergency fund.
Another option could be to rid yourself of credit card debt once and for all with a balance transfer credit card. Or to conduct a financial audit to find out if you could be saving on your essential expenses by switching to a better offer. This could be through a personal loan, on your home and contents insurance, or electricity bill.
If you’d like more information on how to save money during a recession, check out our handy article on this. Or if you’d like to browse some of the latest interest rates from home loans to term deposits, head on over to our interest rates page.