The word ‘recession’ sends a chill down the spines of those old enough to remember the “recession we had to have” in 1990-91. Many YourLifeChoices readers who were operating businesses or buying houses will recall those challenging times with trepidation, as some commentators speculate that Australia may again be heading into a recession.
So, what is a recession? And what is the likelihood of such a downturn in the year ahead? And how might it affect retirees?
In technical terms, a recession is regarded as two consecutive quarters of negative growth in the commonly used barometer of a country’s economic health, Gross Domestic Product (GDP).
GDP is the total value of all of the goods and services produced within Australia in a given period.
Goods comprise everything produced from the farm sector to the manufacturing sector, from apples to appliances, while services can range from plumbing to professional services.
Such goods and services are at the heart of economic activity in Australia – they are consumed by individuals and businesses; are invested in by companies; are supplied by governments, and are exported to overseas markets.
GDP is a measure used around the world to track economic performance. And a recession, put simply, occurs when the size of Australia’s economic pie shrinks over a six-month period.
The recession in most recent memory was the 1990-91 economic downturn, infamously described by Treasurer Paul Keating as “the recession we had to have”.
While he might have chosen his words more carefully, Mr Keating was trying to describe why a recession was almost an inevitable outcome of the economic conditions that existed in Australia and around the world. Economies were over-heating on the back of excessive demand and easier access to borrowings, and inflation was surging as a consequence.
Central banks responded by pushing up interest rates to tame inflation which erodes asset values and earnings. In Australia’s case, mortgage rates hit 17 per cent and business loan rates were more than 20 per cent. Australia’s economy went into reverse in September 1990 and stayed there for a year.
By contrast with the late 1980s, interest rates are at record low levels with the cash rate at less than one per cent, and possibly heading to zero. Inflation is under control at less than two per cent. Wages growth is sluggish and not putting pressure on prices. Jobs growth is relatively strong with unemployment at 5.3 per cent.
Against that background, what do some economists think?
Independent economist Saul Eslake says high interest rates, or an external shock brought on by high interest rates elsewhere in the world, have been behind almost every recession Australia has experienced since the 1960s.
“It’s not obvious to me that there’s a high probability attaching to anything of that nature in the foreseeable future,” Mr Eslake told YourLifeChoices. “Clearly, interest rates are not at recession-causing levels – they are at record lows, and coming down.
“There’s always the possibility of some kind of financial accident and certainly there are pockets of risk in financial markets around the world … (but) it’s not at all obvious that you would put a high probability on there being a recession next year. It’s not zero, something could happen, but I can’t put my hand on my heart and say that the probability is greater than 50 per cent.”
Mr Eslake noted that “the economy is vulnerable to a shock, partly because it is travelling at a very slow pace. It’s like riding a bicycle, you are more likely to fall over if you are going at a slow speed than if you had some momentum behind you”.
“I think the most plausible scenario is more of the same,” he said. “Maybe the improvement in the property market and lower interest rates will put a floor under the softness of economic growth – it won’t get any worse, but it’s not at all obvious that it’s going to get any better, or significantly better.”
Executive director of the South Australian Centre for Economic Studies at Adelaide University, Associate Professor Michael O’Neil, says the economy has slowed – to 1.7 per cent year-on-year, seasonally adjusted – in the face of global forces including the US-China trade dispute and an economic slowdown in China itself. But Australia has not entered a recession.
“Is there a danger on the horizon? Prof. O’Neil asked. “I think economists are increasingly concerned about the build-up of debt, including household debt and low interest rates that are seeming to not have any positive effect on economic growth. Unemployment is low and the economy is still ticking along without any inflation,” he told YourLifeChoices.
“So, we have slower growth, no inflation and unemployment declining – three factors together that economists find a bit unusual. If the labour market is tight you would expect wages to go up and that to lead to inflation, and then the Reserve Bank would try to slow down that inflation rate by putting up interest rates.
“But at the moment we have low wages, low unemployment and very low interest rates … and nothing seems to be happening.”
Mr Eslake’s comment that high interest rates, here or abroad, have been a feature of the four recessions Australia has experienced since 1960, is pertinent to the country’s outlook in terms of a potential recession. On that measure, a recession in the next 12 months appears unlikely.
A number of economists are now saying that interest rates could stay low until well into the next decade, or even beyond.
It’s a scenario that poses much food for thought for retirees who are looking for reasonable returns and capital security. There are higher returns available through dividends on shares and the Australian share market has been performing well. But retirees considering investing in shares should be consulting their financial advisers to ensure they are getting the right balance between risk and reward.
Peter Gill has been writing about public policy, business and the economy over a 38-year career as a journalist, ministerial adviser and communications consultant.
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.