The buzz word of this month is ‘recession’. But what does it mean? How do we know when we are in one and how will it change your life?
What is a recession?
In the purist of economics lingo a recession is either, a decline in a country's total gross domestic product (The total amount of value produced by the country in traded goods and services) or a negative real economic growth. These trends must continue for two or more consecutive quarters of a year.
The colloquial understanding is that the economy slows and consumers feel they have less money to spend on increasingly expensive things.
There are many reasons people are scared of recessions. A recession could mean interest rates go up as the reserve bank tries to control consumer spending, people are spending less money therefore businesses make less money, leading to a reduction in staff and job loses. House prices may drop as less people are buying houses causing an over supply and people may be less likely to invest funds in shares or business to grow for fear of an uncertain market.
BUT I prefer to look at a recession as we do the current drought.
The amount of water in the world remains constant. Whether it is in the form of ice, rain, sea or clouds there is always the same amount. If you follow the analogy that money is like water the value of money may change from assets to cash to options etc. but it can still be found. Therefore, just because Australia is going through a drought or a recession does not mean it is not raining somewhere and someone is getting rich. Do you like my little analogy? Yes? So let’s continue with it.
If there is less money coming into or being produced by our economy, businesses and individuals tend to be more conservative with the money they do have. If people are worried about the value of their house and security of their jobs they are less likely in invest in risky shares or buy the newest biggest LCD TV screen they picked out at Dick Smiths. Most will say, ‘Honey, let’s wait until next year to get that swimming pool installed’. Times this by 20 million people and we have ‘low consumer confidence’ and a further weakening of the economy.
Is Australia heading to a recession?
Most economists are waiting to see which will affect Australia more, Americas’ economic cold or Chinas’ economic growth steroids! Traditionally, America would have won but our location to China and other rapidly growing Asian and emerging countries such as Thailand, Vietnam and India could mean our business and services sectors will continue to grow supporting our economy during this period.
Some experts have reminded us that it will probably still FEEL like a recession even if we don’t meet the textbook definitions BECAUSE Australian consumers/individuals are currently in HUGE personal debt. The mortgage ‘stress’ felt by this months twelfth consecutive interest rate rise has delivered the lowest consumer confidence figures in fourteen years demonstrating the everyday persons’ concerns!
But maybe the conservative tightening of the proverbial ‘consumer spending belt’ will actually be the painful step we have to take to whip our personal debt into shape. The treadmill work out that will prevent the recession heart attack? Australians have been buying up LCD screens, holidays, new cars at an amazing rate for decades – like candy! The halcyon spending spree must slow or come to an end before Australia can build a foundation of sound, across the board economic security.
