A great proportion of the working population have never known a recession in Australia, and others will be haunted by the last in the early 1990s. This time around, I think Australia is in for a different experience to what we’ve seen and known before – and that’s not entirely a bad thing.
The Australian government has, rightly, sacrificed economic activity in the name of health in response to the COVID-19 crisis. It’s not alone in this, as you’d well know, major economies worldwide have done and are doing the same thing, albeit in different ways.
An unfortunate victim in this is Australia’s almost 30-year run of economic growth, we are experiencing our first recession since 1991. The March quarter is most likely to be negative, and the June quarter will see a big hit to economic activity thanks to the virus driven shutdowns, possibly in the order of 10 per cent. In other words, our economy will shrink considerably as this virus runs its course.
Again, Australia won’t be alone in this, a global recession is likely as major powerhouses like the US and China factor in the huge economic hit of social distancing, isolation measures, and virtual shutdown of regular activities, businesses and services that are not essential.
There are a range of factors Australians will feel as we move through the recession period, and a big one will be how tough the jobs market is. There will be much higher unemployment, it will be harder to switch jobs, and it’s reasonable to expect more redundancies and terminations as the crisis continues.
This leads to a loss in income and falling wages, which reduces the spending power of affected Australians. Compounding that, even for those who are holding on to their jobs, uncertainty will rise – people worry about the future, they worry about their income, they worry about their employment prospects. That will impact spending patterns, and how much people are willing to part with beyond the essentials.
It’s worth pointing out some of the potential opportunities for investors who are prepared to take a long-term view. For one, interest rates will be lower, the official cash rate is currently sitting at the all-time low of 0.25%. This will mean it’s cheaper to service a mortgage.
The residential property market is also likely to take a hit, which could provide lower entry points for people who have struggled – particularly in cities like Sydney and Melbourne – with affordability. The same logic applies to shares. Although the market is currently doing it bad, for those with a long-term outlook, there are opportunities to find value at a lower price point in a bear market.
Finally, the thing I think will be different about the recession before us and those Australia has seen before, is that the current crisis is not the result of a bust after a boom. This is an enforced shutdown and a significant disruption – it was not caused by anything fundamental in the Australian economy. Because of that, I am hopeful that once the virus is under control, we can recover and reach a more normal functioning in a quicker way than we have before. Adding confidence to this is that government and financial support programs – notably the wage subsidy and debt payment holidays – have been applied early and aggressively and should help offset protect many businesses and individuals so that the economy can bounce back reasonably quickly once the virus is under control.
Subscribe to SMSF News below to receive my latest articlesShane Oliver, Head of Investment Strategy & Economics and Chief Economist
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