Is this a real or fake recession?

This is one of the strangest questions I’ve heard over the past month, and it’s one I’ve been asked a few times. In this article, I briefly explain why the Australian economy is in recession, and why some of us may not feel as though we are in recession.

The economics

To be clear, from an economic viewpoint, Australia is absolutely experiencing its first recession for almost 30 years. The June quarter GDP numbers showed our national economy fell 7 per cent, following the March quarter’s 0.3 per cent decline. In very simple terms, Australia’s economy has ‘gone backwards’ in two consecutive quarters, which is the commonly accepted definition among economists of a recession.

It is worth pointing out at this stage that these numbers, particularly the June quarter numbers, point to a far more severe recession than Prime Minister Keating’s ‘the recession we had to have’ of 1991 where GDP only shrank 1.3 per cent and 0.1 per cent respectively. I’m sure some of us still remember this. Clearly, the significant reduction in GDP in the most recent June quarter was a result of the required ‘lockdowns’ of our respective cities and states as a response to the COVID-19 pandemic. Spending dried up significantly as places where people could spend their money closed. While some of these places have re-opened in different cities and states across the country, they have remained closed in others. This, it would seem, is why some are wondering whether they are in a recession or not. The numbers that I’ve outlined above are, of course, national numbers. We know that some states are faring better than others, and some industries have suffered a lot more than others, notwithstanding the success of JobKeeper keeping many businesses afloat. As such, while many businesses are struggling, many have been supported via the various state and federal stimulus packages, thus making it feel as though some people and businesses aren’t actually impacted (even though they would most certainly have been, but the impact has been cushioned via various government stimulus policies).

The stimulus impact

Government payments have temporarily supported people and businesses, thus not allowing for the dramatic reduction in expenditure that we may have seen were this not the case. This, combined with fewer outlets open where people can spend money, has paradoxically led to an increase in savings. This is a good thing, although ‘saving yourself out of a recession’ isn’t a successful economic strategy. Business conditions need to improve with jobs and services returning to normal, where spending stimulates growth for the economy so it can successfully dig itself out of recession. While not wanting to comment on border closures, the economic reality is that business conditions won’t return to ‘normal’ until those borders are reopened. When they do, we will get a sense of how quickly the economy can bounce back. There are businesses that are on ‘life support’ during the shutdown that may not reopen. Others, though, will bounce back with gusto.

The shutdown impact

As we look at the data of those sectors most impacted by the COVID-19 shutdown, the businesses that have been heavily impacted are those in tourism, hospitality, retail and the arts and recreation sectors. It is these sectors that are feeling the biggest impact of the shutdowns and the ones that rely heavily on the free movement of people. Without that, their ability to return to profitable trading conditions will be severely tested. This encapsulates the essence of the recession; some are impacted by the recession and others are not.

Business size and sector advantage

Indeed, if we look at job losses as a barometer of who has been most impacted, it is small to medium sized enterprises (SMEs), with Victorian SMEs not surprisingly the hardest hit. This is particularly the case for those SMEs within the hospitality, tourism, and retail sectors. In comparison, companies with workforces with more than 200 employees have only experienced, on average, substantially lower job losses. So, in summary, we can see that SMEs are more impacted, on average, than larger firms as larger firms typically have larger ‘war chests’ to steer themselves through prolonged economic hardships. Some businesses have found they have had their incomes relatively unimpacted during this time, but their costs are lower as reduced travel and other operational expenditure has seen some firms saving during this time.

Signs of recovery

So it is therefore quite understandable that some people feel there is a recession in place, and others do not – as if there is a two-tiered economy in effect, almost binary in nature. Some have been impacted by the recession, and others have not. The longer governments perceive the lockdown as necessary and people’s travel and commerce is restricted, the wider will be the economic and social fallout. As a nation we are seeing strong signs of recovery with the virus in all states, some slower than others but heading in the right direction nonetheless. I believe we are starting to see the light at the end of the tunnel.

Seek support

For those firms and individuals that have been impacted by the lockdown, if you are struggling to juggle your financial circumstances or wish to explore a more sustainable future, I encourage you to speak to your local Bentleys advisor about your situation. It may well be that there are additional avenues for grant access or cost reduction strategies available to you which may assist you until the nation gets on its collective feet again. Note that it’s important to be focused on not just survival, but ensuring you have the right strategy to ensure the long-term viability of your business.
If, as an individual, you are stressed and feeling anxious, please know that you are not alone. Bentleys is supporting the RUOK? Foundation during this time and we encourage all to reach out and talk to someone if they feel they are moving into a negative head space. It’s okay, and there are people you can talk to that can help you with whatever you are dealing with. If you feel you need professional support, I encourage you to reach out to professionals, such as those at Lifeline (Australia telephone 13 11 14; New Zealand telephone 0800 111 757), who are available to help you.
We, at Bentleys, are doing everything we can to help businesses come out of this challenging time in good shape.
We will continue to update our COVID-19 resource hub with important developments, so please return soon.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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