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Hewison Insights

What causes a recession, and what might it mean for you?

Chris Colman
Wealth Adviser
27 Jun 2023

The last 12 months has been a whirlwind and Australians have been dealt what seems like blow after blow. Whether it’s soaring inflation, supply chain issues, the Reserve Bank hiking rates up in 12 of the last 13 meetings – and living costs blowing out over the last year, it would seem everyone has been impacted in some way. Now, there is another word that you will be hearing more and more, and one that we are being warned about: Recession. 

But what precisely does that mean and how can we prepare for it? 

When you hear the media and economists speak about recessions, what they are referring to is a “technical recession”. A technical recession takes place when the gross domestic product (GDP) of a country either falls or comes up negative for two quarters in a row. Recessions can last a few months to a few years and generally result in a sustained period of slower economic output which will put financial stress on the nation. 

During a recession, you might expect to see the following things in the economy – a drop in household spending, large numbers of job losses, decreasing investment in business, company shutdowns and rising loan defaults. 

Examples of prior recessions would include the Early Nineties Recession (91-92), the Global Financial Crisis (07-09) and the Covid-19 aftermath (March – June 2020). The Covid-19 downturn is still unfolding, and time will tell if it is a genuine recession or just an economic hiccup. While the ASX200 fell sharply (~32%) in March 2020, it recovered all losses within 14 months. 

What are the causes? 

When a recession takes place, it is generally due to a large number of factors which make it challenging to pinpoint exactly what is to blame. Some common causes of a recession can be: 

  • High interest rates 
  • Rising unemployment 
  • Supply-chain disruptions 
  • Stagnant or declining wages 
  • Inflation pressures 
  • Pandemics, trade embargoes or war. 

You’re correct, our current environment ticks a lot of these boxes and that is what has economists worried about a possible dive. The CBA puts the risk of a recession in 2023 at 50%, with mortgage stress mounting on Australians due to the RBA’s inflation-fighting rate hikes.

Having said that, unemployment is a reliable bellwether for recessions, and it has risen in the last few months. Recessions can be an unavoidable part of a business cycle, even in their mildest forms, so it is important to take a long-term view and not worry about a short-term drop. 

If Australia does enter a recession for a sustained period, there will likely be flow on effects to the labour and housing markets, while households continue to fight the cost-of-living battle, and a probable volatile share market.  

One of the best ways to insulate yourself from a recession is to reduce your exposure to possible fallout. While the economy may not be in your, or our control, the way you are invested and the way you react to a recession is. It is imperative to be patient and stick to your investment strategy so you can capitalise when opportunities arise. Market volatility can create the best buying opportunities when you have a long-term investment horizon. A key point to remember is financial markets are forward-looking and have already priced in predictions. Having a diversified strategy in place with multiple asset classes will also reduce your volatility during times of market stress.