Ask the Experts – Recession

ask the experts-recession

We asked Tribeca’s Brad Fox to share his insights into the challenges and opportunities facing Australia as we head into a recession.

Is Australia officially in recession and what does ‘being in recession’ actually mean?

Okay, so the accepted economic definition of a recession is two consecutive quarters (six months in total) of negative growth meaning the economy got smaller. We measure growth by our GDP – the Gross Domestic Product – which is basically every service and good that is produced. Due to the COVID-19 crisis, Australia has now had two quarters in a row where we have produced less than the previous quarter; therefore turned over less money. Hence, we are now in a recession.

The most important aspect of the times we’re in now is: how does it feel to you, your family, your employer, your business, your workplace, your colleagues? There are going to be challenges and losers…of course there is. But a recession can also mean there are winners. Out of the Great Depression – the 1929 economic crash that resonated around the world over for nearly 10 years – there were more millionaires made during that time in America than any other period in their history. 

What this points to is that some people find great opportunity through great change. And that’s what a recession generally creates; a shift in how the marketplace works, and therefore, how we as individuals think and react to it.

For a more in-depth description of ‘what is a recession’, please see this great Forbes article.

What major impacts are we likely to see from this recession?

First of all unemployment increases. And casual labor often feels the brunt of that first followed by full time employment. It then reverses during the rehiring phase, where casual employment is often what comes back first.

What’s important to note is Australians in their 20s, 30s and 40s have never worked at a time when unemployment is a significant issue. We’ve had pretty low unemployment for a long time, so this will take a major adjustment, particularly for people in regional areas where unemployment is typically hit the hardest. So one of the things that can happen in a recession is you start to see people moving from country towns to the city to chase the work. Unemployment is definitely one of the major impacts.

When we talk of employment, in a recession you’ll also see a lot of upskilling. In fact we’ve already seen this playing out during the COVID restrictions. Whether you’re employed or unemployed, now is a great time to be thinking about what training you might want to take, looking for future growth areas of the economy. What are those key areas or industries that we are going to need more of as we go forward and rebound from the recession?

How the government responds is also critical, and this will vary depending on which party is in power. A Liberal coalition is more likely to want to try and free up private enterprise and empower people to have the courage to borrow money and invest in business and seek growth. To take risk to kickstart the economy. A Labor government, however, will want to spend its way out of recession; to kickstart the economy by creating jobs with money borrowed on behalf of the public. So you get quite a different approach, and each approach in many ways will dictate how people respond to the economic challenges. This Covid-led recession has seen the Liberal government more prepared than usual to support the economy with debt…and it will take decades of higher taxes to repay and service this debt in the future. 

Another impact is that people act more frugally. So spending decreases, which is obviously a challenge when trying to grow the economy. You’ll see a move away from buying that luxury item. Maybe putting that renovation on hold. Or changing that $30,000 overseas trip (when we can travel again) to hiring a beach house locally.

And on that last point, the nature of tourism will significantly shift, as we have already seen in stark reality during 2020. This will also have repercussions on our economy with less overseas visitors, balanced in part with more domestic travel when borders reopen.

Want to know what financial support is available from government in response to COVID-19?

Click here for Federal packages.

Click here for additional Victorian support due to Stage 4 restrictions.

Are there any learnings we can take out of the last recession in the 90s?

If you find yourself unemployed or needing to change your career, go and try something that has a passionate attachment for you and is likely to be in demand as the economy bounces back. Maybe now is not the time to go and do a course as a barista, as there will be plenty of unemployed coffee makers out there. But if you’ve got some interest in software for instance, you might want to consider a course in IT, programming or Artificial Intelligence. Or maybe you’re keen to undertake study in counselling or social work to help people dealing with the challenges post COVID.

In the last Australian recession in 1991, there wasn’t any online learning. Today you can learn from your living room, and don’t even have to pay for a course. There’s plenty of free options available on platforms such as Coursera and Edx, which offer hundreds of courses and degrees through universities and organisations all over the world.

For those people who are in a job but have been planning on leaving, a word of warning. Make sure you’ve got something lined up before taking that step. That’s certainly a lesson from the previous recession. With more people competing for work, it’s important to make smart decisions to protect your current employment.

Another aspect that we didn’t talk about much in the 90s, but was certainly a major issue to learn from, is the impact of a recession on our mental health. Now’s a great time to build personal habits and resilience, and to look after yourself by seeking help if you need it. Whether that’s talking to family or friends, or seeing a health professional. We all need to speak up, and not feel any stigma in doing so as confronting as that can be.

An important aspect to remember about a recession is that it will end; that the tide will eventually turn. Yes, we can be caught up in it as the economy drags us out whilst in recession. But eventually the tide turns and starts to come in. There’s comfort in that, as we shouldn’t feel alone. It’s hard as we all try to swim against the economic decline, but the economy will pick us all up again in the natural flow as we bounce back out of recession. It’s about positioning ourselves to be ready.

If you have concerns for your mental health or that of a loved one, please seek professional help or reach out to one of the many helplines available such as:

Lifeline                      13 11 14                   
Beyond Blue            1300 22 46 36                     
Kids Helpline           1800 55 18 00            

How can we best prepare and protect ourselves for the challenges ahead?

The first step is to control the controllables. And one of the greatest sources of risk we can control is debt.

In the last ‘recession that we had to have’ (to paraphrase the then Australian Treasurer, Paul Keating), interest rates were around 17-18%. Hard to believe. Today, they’re at record lows which is a major difference and advantage. So use this time to pay off debt.

Be more deliberate with your spending. The use of paid subscriptions such as Netflix, Disney, Kayo and so on have gone up dramatically during the COVID restrictions. Maybe you don’t need all of them at once, so think about reducing them as they all add up over the month. The idea is to screen what items you’re spending on to reduce your expenses.

As I’ve mentioned previously, now is a great time to do some learning or re-skilling. If you find yourself out of work, try to turn this into a positive by focusing on your own self-development – do a free course; start up a new fitness regime; write down some new career and life goals. And talk to your financial advisor who can help you with these conversations.

If you’re someone who’s employed, you want to build up your cash position. Maybe the overtime that you rely upon will dry up, so it’s good to have that cash buffer to be able to draw on. If you’re in a strong position with your career and finances including debt, it could also be a good time to start to invest slowly, sensibly and deliberately. Of course, family and friends are the priority if they need help and you can provide it. But if you have the capacity to take advantage of the market weakness – take that advantage.

For specialist help in career transitioning, we recommend contacting SHK.

Crisis often brings opportunity. Are there any opportunities that provide hope out of this recession?

Yes there are. But it will be different depending on your stage of life.

If you’re a university student at the moment, it might be a great time to double down on your education, especially as opportunities to travel overseas and get work experience will be limited at least in the short-term. Make the most of this time to build up your skills and learning so you’re ready when everything starts opening up.

For those in those middle career years, 30-50, it may be a time of reassessing – whether that’s forced or by choice. So this could be shifting your career direction by taking one step back to then take two or three steps forward. This can be an exciting time to find a new purpose that provides more fulfilment and enjoyment – whether that’s changing careers, writing that book or creating that website you’ve always talked about. A recession can actually be a real positive to push someone to take that risk; that leap of faith to go out and pursue their dreams. As I said at the outset, many successful businesses and entrepreneurs are born out of tough times like we’re experiencing now.

Retirees are most likely the ones to find this period the toughest because of the unstable economy. This is why a good retirement plan is so important as it can remove a lot of that uncertainty. It also provides a great sense of security to know how your money’s going to see you through this period and through your lifetime. Some good modelling from your financial advisor will clearly demonstrate this and increase your confidence. For example, if you’ve been living off $50,000 a year for the last five years there’s no reason why this will change if you have a solid financial plan in place. All that might change is reframing your thinking from how you spend your money. Maybe it’s not taking that overseas trip in the next two or three years but focusing on Australian travel. And that in itself can open up some exciting opportunities you may not have considered.

At the end of the day it’s about retaining your sense of hope no matter what stage of life you are in. And to continue living your own version of your “Good Life” filled with meaning, purpose and relationships that matter.

We are all in this together. And we will all come out of this together.

If you would like to discuss your current financial situation and/or establish a plan for the months and years ahead, we’re always ready to chat. Please talk to your advisor or arrange an appointment with one of our Tribeca Tribe here.

We are also offering a free 45-minute consultation if you have suffered financial hardship due to the impact of COVID-19. Please see here for more details.

Would you like to read more from our experts? You can by clicking on the following links for our Ask the Expert articles on superannuation and lending.

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