How will retirees deal with a recession in 2020?

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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.

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Written by petergi

24 Comments

Total Comments: 24
  1. 0
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    The current fries will require lots of rebuilding which will postpone a recession for a couple of years.

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      So you hope that a national tragedy will fix an impending disaster i bet these idiot people running the country are hoping the same thing especially after saying only Labour would give us a recession one of many lies

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      All I said was the reality of what is likely to happen. Anyone with shares in the right companies is likely to benefit from the reconstruction boom.

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      600 something houses burnt down, yeah that’s going to be a massive boom in construction, hahaha

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      So true – I’m off tomorrow to volunteer unload a load for a rebuild for an elderly couple burnt out…

      Bloody volunteers will ruin the economy…. first the droughts, then the floods, then the droughts again, then the fires – and now the bloody volunteers…

      How much can I put you down for, for the fundraiser for buying water bombers, BB?

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      Zilch as I have made my contribution with over $10,000 in insurance.

  2. 0
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    I would say that a lot of the comments by the economist are true,the only one I have a concern about is the unemployment figures,too many people are under employed,that is actual hours of work,if you work only 1 to 10 hrs a week I can’t see how your not in the unemployment figures,this is where the Govt are getting away with their so called low unemployment figures.

    • 0
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      Yep, the figures don’t tell the true story.

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      sainter you are so right even the piece of c..p Cash said 1hr a week is a permanent job

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      ..and we pay that cretin…

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      If our current Fed Govn’mt is “getting away with their so-called low unemployment figures” ie: including millions of under-employed (even if only have paid work for 1hr wkly), what other figures/estimates are they getting away with? Suspect there’s heaps more they’re not telling us, why our spending/disposable income has been so very low for a few yrs. Financial Advisors – we’ve all heard abt the many “rip-offs” & exorbitant fees. Do your own research. Got my car insurance annual renewal notice 2day, it’s up almost 10%, they’re not going to suffer too much because of our wonderful country’s shocking fires altho’ wouldn’t buy their Shares. Aus is a disaster in many ways, the term “recession” needs to be recalculated as think we’re already there.

  3. 0
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    I would say that a lot of the comments by the economist are true,the only one I have a concern about is the unemployment figures,too many people are under employed,that is actual hours of work,if you work only 1 to 10 hrs a week I can’t see how your not in the unemployment figures,this is where the Govt are getting away with their so called low unemployment figures.

  4. 0
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    The fires will have an impact on the economy and it will depend upon how the Government handle it as to what the outcome will be. Personally I am not too hopeful about a positive outcome as economists are still locked into theories that are not working at the moment.

    The claim on low unemployment is quite absurd given the high level of underemployment where people cannot make a decent wage because of a lack of hours of work available to them. The “gig” economy is “God’s” to employers with the power all on their side.

  5. 0
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    So no recession this year so what the *** is this article title about?

    Yet another example of YLC clickbait.

  6. 0
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    Saul Eslake is someone I could trust, but I would never put science and economics in the same paragraph.

  7. 0
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    What has brought this topic up? Is it a slow news day? Nobody, but nobody, is talking about a recession or even hinting that one may be on the horizon yet for some unknown reason we are served up this load of rubbish. As Pauline might say: “Please explain?”

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      The talk has to start somewhere.

      It’s obvious the country is not going as well as the gov would have us believe – massive UNDER-employment, retail sales down, new car sales way day for over a year now, wages growth non-existent and interest rates at record lows and not helping.

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      Wrong. There has been a lot of discussion about a recession happening in the US, and that would definitely have an effect on our economy. So to say nobody is talking about it depends on what news stream you follow and obviously yours is not one of them..

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      Good question, Horace, and a very good answer, Greg. Overall, a Recession being considered as two Quarters of negative growth is quite possible as we have been bumping along the bottom for a very long time, and all of the factors as Greg has noted plus possible shock from an overseas event could tip our weak economy over the edge.

      However, do I think it is likely? No, for the same reason as I mentioned a year ago when some economists were (wrongly) predicting a recession in 2019, i.e. Trump will ensure there is no recession there as he needs to get re-elected, and that will pull us along.

      Comments by economists like Eslake are relevant, however he has missed a point – it is not just a matter of high interest rates, rather it is the INCREASES in Rates which will cause a recession – just like that moron Keating created the 1990 recession by jacking up interest rates severely, currently there are very high levels of debt at low interest rates, hence large increases will cause a recession. However, as I mentioned, that is unlikely as we tend to follow the USA nowadays.

  8. 0
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    So construction is going to be full on, we will need a lot of tradesman where will we get them from we don’t apprentice in this country the LNP cut that back we will bring in more trades company’s don’t have to pay to train and the workers will pay tax we will get surplus and the company’s can rort it no tax

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      My son is a tradie – he’s in Holsworthy Army barracks at the moment – not saying what he’s up to… little 6’5″ rat – I told him not to go in harm’s way without me…

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      Construction will only be “full-on” if majority of ppl who so very sadly lost their homes/buildings/possessions etc are insured – simple fact is that many were not. Fully qualified good Tradies have more than enough work closer to CBD – ppl will be ripped-off by unqualified “pretenders” quoting cheap prices & yep, insisting on cash payments only (no tax paid)…that won’t be controlled as never has been. Yet another glaring mistake by LNP re: discontinuing appenticeships. One thing I’m looking fwd to hearing abt is who will be responsible for allocating the very many $Ms (possibly $Bs) of cash donations from we Aussies (& ard the world), what their criteria will be, + if & when it’s all made public. Also look fwd to hearing/knowing how much the chosen Allocators will be paid for their “service.” These shocking fires are most sadly both very personal & financial disasters for many 10,000s of our dear Aussies – it may also prove be a national financial disgrace.

  9. 0
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    On the books? Bit late???

  10. 0
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    We have no reasons to be in any RECESSION, at least not in the first half year!
    The economy should be and WILL BE WHEN THE RESERVE BANK LIFTS ITS RATES which is WELL OVERDUE NOW!
    Australian businessmen are far too stodgy and conservative so need to be more entrepreneurial!
    They have been like this for far too long for our own good!
    Lift the rates and we WILL see business confidence SOARRRR!


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