It might be hard to believe, but Australia hasn’t had a Recession since 1991 (though there have been three ‘mini’ recessions since then) - and even then that was ‘necessary’ in order to curb the excesses of the 1980’s that lead to high debt, inflated interest rates and an economy that was stretched thin. That recession lasted virtually a full twelve months and saw a sharp increase of unemployment rates, rising to 10.8%, where Victoria bore the brunt of the force of the Recession, recording an employment loss of 8.5% compared to the average 2.2% seen in our other states.

Not only dealing with rising unemployment rates, our last big recession saw several financial institutions fail spectacularly and resulted in other empires crashing, including Christopher Skase who fled to Majorca during the crisis and Alan Bond who declared bankruptcy and was subsequently jailed for fraud in 1997.

Now, after almost three decades of virtually steady growth, indicators are pointing to Australia facing another big recession, helped along by the timing and severity of the recent bush fires, drought and now, COVID-19 - Coronavirus. But, it seems the writing has been on the wall for quite a while:

Wage Growth Slump

A turning economy relies on consumers having the disposable income to spend. This spending creates jobs, giving rise to higher employment levels and thus encourages wage growth. Despite reasonable wage growth forecasts, the reality over the five years to November 2018 according to a Government report showed an average increases of only 2.2%, compared to the average of the preceding five years of 3.3%

Car Market Stalls

For almost two years, the Federal Chamber of Automotive Industries has recorded declining month on month sales numbers. When wages stall and consumers have less to spend, purchasing new cars is often a small priority and this metric has long been considered a measure of an economy’s health.

Reluctant Auctions

While house prices may have started to recover over the recent months, it is important to note that these prices are heavily reliant on the amount of housing stock that is available in the market. Not only that, but those that do go up for sale are staying on the market for longer. On top of that, the incidence of mortgage defaults has increased, largely as a result of ‘high debt levels, subdued wage growth, the conversion of a large number of interest only mortgages to principal and interest loans and house prices.’ (Moody’s Australian Delinquencies Report 2018, cited in Cooke 2019).

Rising Debt Levels

There are two types of lending: prime and sub-prime. Simply put, a prime loan or mortgage is one that the consumer should have little to no issues repaying and have borrowed less than five times their annual earnings and the repayments come in at less than 30% of their monthly income. A sub-prime loan is one where the requirements for a prime offering have not been met and has a higher incidence of failure as the often high repayments and/or interest result in the consumer being unable to continue to repay such a loan. While Australian lenders consider all of their loans as prime, it is easily argued that this is not in fact the case, with up to 40% potentially being incorrectly classified (Hobbs, 2019). Additionally, as almost half of the lending market is made up of investors, in the event of a market shift, they will often be the first ones to default when the risk of the investment shadows the risk of the default penalty.

Declining Retail

It is no secret that our retail industry has been taking a hit for a while, with many retailers falling into administration and shutting their doors. In fact, the level of present spending is a level that hasn’t been since since the beginning on the 1990’s and is potentially an indicator of what is to come.

Travel in Trouble

Australians are not booking holidays and when they do, they’re shorter. Now, with the threat of COVID-19, the travel industry has virtually ground to a halt, resulting in the Government releasing a bail-out package to ensure that those Australians that are employed are able to remain so for as long as possible.

Rise of the Online Lay-Buy

Afterpay, Humm, Openpay and others make it easier than ever for consumers to purchase goods and services and spread the cost out over a longer period, conserving their cashflow. With minimal fees and barriers compared to traditional credit options, this trend has seen a significant decline in credit card holders and spending - a sign that Australian consumers are tightening up and being more thrifty.

Gold is Gold

A last resort for those looking to invest in something with some stability, the price of gold has increased exponentially, increasing over $1000 USD /oz in a single month around mid 2019 (Finder, 2019) and then again in February 2020 to $1682.40 USD/oz before falling to $1528.10 USD/oz at the time of writing (Market Index, 2020).

The Positives & Negatives of Recession

When most people think of recession, the first thing that hits them is fear, but understanding both the negatives and the positives of a Recession, will help us to prepare and get through it.

Negatives

• Higher levels of unemployment

• Fear

• Slump in Asset value

• Decreased spending

Positives

• Disposal of excess

• Balance economic growth

• Creates buyer opportunities

• Change of consumer attitudes

• Increased saving

Effects of Drought

According to the Climate Council (2018), drought has a substantial impact to Australia, including health, water supply, ecosystems and the economy. The loss of livestock, crops and intense soil erosion then affects employment, production, food supplies and potential export earnings. During 2007 -2008, a drop in the Murray-Darling Basin GDP resulted in a loss of 6000 jobs. During an extended drought, the likes of which have not been seen in some parts of Australia since the early 1900’s (Murray, 2019), agricultural output declines could wipe as much as $12 Billion from our economy.

Despite farmers now being better prepared for drought, and the industry not holding as high of an export representation (Eslake, 2018), when drought is long and widespread, the combined effects of the drought impact on a larger scale, potentially resulting in many transitioning out of the vocation and a range of grim social and economic outcomes.

Effects of Bushfires

Another hit for our economy came with the recent bushfires, which dwarfed the devastation caused by Black Saturday at a rate of 8.4M hectares compared to the 450k hectares decimated in 2009. Black Saturday claimed 173 lives, and as it tore through Marysville, virtually gutted it. It seems that where bushfire is concerned, it is generally local economies that are hurt by the disaster and in the wake of it. But, due to the scale of our recent bushfire emergencies, it is likely that the economic damage will exceed the $4.4B impact of Black Saturday as a result of air pollution and the effects to farming and tourism (Butler, 2020).

Effects of COVID-19

As Coronavirus slowly invades more aspects of our daily lives, businesses across almost all industries in Australia are starting to feel the crunch, some more so than others as they are forced to scale back operations and staff in response to highlighted measures and a loss of consumer confidence. According to KMPG (Ryan, 2020), the best outcome that Australia can hope for at this stage, is a decline in Australia’s economic growth of 0.9%, which, even with the Government’s proposed stimulus measures, would translate to an economic loss of $17B, through to 2021 before slowly beginning to regain growth.

…it is important that we all continue to support Australian businesses, shop online, stay in contact online or by phone and despite these adjustments, aim to mitigate the economic downturn that we are teetering on the edge of.

The Bottom Line

Even without the drought and bushfires, the economic toll globally as a result of COVID-19 is already prevalent and the threat of a recession on a global scale is now a very real and very frightening possibility. Looking at the modelling provided by KMPG, it could take almost ten years for Australia to return to its growth trajectory, provided that this pandemic does not worsen and is not long-lasting. If it does and the crisis remains longer, with irrational behaviours continuing, the outcomes for us all could be more pronounced. The stimulus package announced by the Morrison Government may be enough to keep us from falling into a full recession, provided that we as business owners and consumers continue to invest in our economy. While we are advised to socially distance ourselves for the time-being, it is important that we all continue to support Australian businesses, shop online, stay in contact online or by phone and despite these adjustments, aim to mitigate the economic downturn that we are teetering on the edge of.