The Coronavirus pandemic has had a costly impact on world economies – one that has pushed individual countries, including Australia, into recession. But what does this mean?

After spending months in lockdown to curb Coronavirus, many countries have been able to assess the impacts on their economies – a cost shock that has led some nations, including Australia, into recession. This may sound concerning, but as the Investments team explains, expansion and contraction in an economy is normal – meaning recessions form part of a regular economic cycle.

Firstly, what defines a recession?

In Australia, a recession is often defined as two consecutive quarters (or six months) of contraction –a significant decline in economic activity. However, two quarters of contraction alone is not always enough to determine a recession; a number of key indicators may also be considered before a recession is officially declared, such as increased unemployment, decreased business and consumer spending, financial market volatility, and lower gross domestic product output (referred to as GDP – a leading economic indicator that measures the sum value of all goods and services in an economy).

So, is Australia in a recession?

Because of its contagious nature, Coronavirus led to social-distancing and lockdown measures that shut down much of the world’s economy, including Australia’s – and this has had an impact on Australian life. So, is Australia experiencing a recession? Based on the technical definition of two consecutive quarters, as well as government confirmation, yes – Australia is in a recession. Data from the Australian Bureau of Statistics has provided more insight into the state of the economy:

• Following a 0.3% contraction in the March quarter, Australian GDP fell 7% over the June quarter, representing the largest decline in quarterly GDP since records began in 1959.
• Over the quarter, a 12.1% decrease in consumer spending and a 17.6% decline in spending on services (e.g. transport, tourism and hospitability) were key contributors to the decline – reflecting the government’s movement restrictions and temporary closure of businesses.
• The decrease in spending led to an increase in household savings, with households saving 19.8% (or about one in five dollars). This was partially supported by a 41.6% increase in social assistance benefits as part of the government’s economic response to Coronavirus.
• Over the financial year, most industries recorded a fall in the gross value they contributed to GDP. Hospitality and tourism made particularly negative contributions to growth, while mining and financial services made positive contributions over the same period.
• During the year, spending on transport services fell 88% due to travel restrictions, while spending on accommodation services (77.5%), catering (55.7%), and recreational and cultural services (54.5%) was also down due to social-distancing and containment measures.
• At the same time, spending on household tools (30%), appliances (21%), and recreation and culture goods like audio-visual and exercise equipment (21%) rose as consumers were mandated to stay indoors and/or work from home.

Outlook

So far, Australia has fared better compared to some other countries – with the UK contracting 20% and the US contracting 10% over the June quarter. According to the Reserve Bank of Australia (RBA), while the Australian economy is experiencing its biggest economic contraction since the 1930s, the downturn is not as severe as previously anticipated. With a gradual – albeit uneven – recovery underway across most of Australia, the RBA’s baseline future scenario includes:

• economic output falling by 6% over the remainder of 2020 but growing by 5% in 2021
• an unemployment rate that rises to 10% by the end of 2020 (exacerbated by job losses in Victoria) but gradually declines to about 7% over the coming years
• inflation remaining between 1%–1.5% over the coming years
• ongoing fiscal and monetary stimulus given continued uncertainty as to the outlook for both the Australian economy and labour market
• a potentially stronger recovery that could occur depending on containment measures and a less cautious approach to household and business spending. Additional containment measures and a decline in spending could impact future economic growth to some degree.

The depth of this recession and the speed of an economic recovery are uncertain at this time – and this could continue to be the case until a vaccine is developed and distributed. But it may be helpful to remember that although Australia is not out of the woods, the country’s last recession lasted less than two financial years (1990–1991) – followed by nearly 30 years of economic growth thereafter.

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Source: Colonial First State