We are in a recession but what does it mean

The Covid 19 Crisis has had a very costly impact on our economy as a whole many countries have been pushed into recession including us here in Australia. But what does this mean?

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 are we actually in a recession?

The data as well as confirmation from Treasury indicates the answer is yes

  • 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.
  • 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.

It's not all doom and gloom we are seeing a vast array of economic response and stimulus with a gradual – albeit uneven – recovery underway across most of Australia. 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.

See original article here courtesy of Colonial First State Investment Management

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Posted in Finance, Financial planning.