Is a recession on the cards, and what would it mean for you?


Economic concerns are once again growing as the possibility of recession becomes more real. In comments made earlier this week chief economist at the International Monetary Fund, Pierre-Olivier Gourinchas, indicated that tough times were ahead for the global economy.

"The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next. The three largest economies, the United States, China, and the euro area will continue to stall.

"Overall, this year's shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession."

is australia facing a recession

So what's stoking these recession fears and what kind of impact would a recession actually have? Read on as we run through some recession basics and look at the current state of affairs with the help of two experts.

What is a recession?

Interestingly there's no general consensus on how a recession is defined says Matt Grudnoff, senior economist at The Australia Institute, as it very much depends on where you are in the world.

"The technical definition of a recession in Australia is two quarters of negative economic growth - so if the economy, if GDP, contracts for two quarters in a row. In other countries, like the US, they actually have a board that determines whether or not the economy is in recession, and that may or may not be two quarters of negative growth.

"If you think about a recession, one of the most debilitating parts about it is around unemployment. And in particular, in the US, they take into account things like the rise in unemployment, or the fall in employment. And that's of part of their definition as well."

When was the last recession in Australia?

It's easy to forget given everything that's happened over the past few years, but Australia actually entered recession during 2020 - the first time it had done so in almost 30 years. As Grudnoff explains, the causes and impacts of the recession two years ago were unusual though.

"The recession we had in 2020 was a really bizarre one and it didn't have a great deal of individual impacts which is quite strange," he says.

"I think that was largely because there was absolutely nothing wrong with the underlying economy. The government essentially shut the economy down for a period of time for quite legitimate reasons, but when the economy was reopened it bounced back to life because there were no underlying issues."

How are individuals typically impacted?

Recessions are, of course, more than just a way of describing economic downturns, because they come with real implications at an individual level.

"If we don't actively try to manage the risk of a recession some of the outcomes that could take place would be the probability of unemployment increasing, house prices going down and some households going into financial stress - especially those who don't have enough savings," says Konark Saxena, an associate professor in the School of Banking and Finance at the University of New South Wales.

According to Grudnoff, the recession which hit Australia in the 1990's can serve as a reminder of the devastating impacts that downturns can have on individuals.

"If you go back to the recession in the early 1990s it had massive scarring effects, particularly on the labor force. There were two groups that were most heavily impacted: young people coming out of school and university who had just got jobs before the recession hit, but also those over the age of 50.

"There are a lot of men over 50 who became unemployed in the early 90s of which a big proportion never got a job again. The reason for that was that when the economy started recovering, they'd been unemployed for a time and were essentially competing with younger people. Age discrimination was part of it, but there was also a change in the sort of jobs that the Australian economy was looking for."

What's behind the latest recession threat?

If you had to zero in on the cause of many of the economic maladies facing Australia and other parts of the world right now, rising inflation would be the main culprit.

Australia's Consumer Price Index (CPI) hit 6.1% in the June quarter which is the highest it's been in decades, and it's expected to rise further when new data is released later this month. And in many other countries, including the US, inflation is running even higher.

So as central banks around the world try and rein in inflation by lifting interest rates, one of the outcomes is an economic slowdown, explains Saxena.

"Of the factors that are largely talked about in the media, inflation is a big one. But I think of all of these factors, including inflation, as really being outcome variables. The driving force of where we are right now has to do with the amount of stimulus that has been in economies around the world, which is now starting to push up inflation.

"The fear is that inflation is going to get out of control, so now policymakers are having to try and control that even more, but in doing so it's possible that they might affect growth rates around the world and cause a large downward revision in prices in financial markets."

Grudnoff notes that the recent inflation spike can't only be addressed by increasing interest rates though, as there are still a number of pandemic and war-related supply-side factors in play.

"US inflation is, in part, caused by demand-side factors and the economy is running particularly strong, but like ours, there are significant supply-sidefactors too. Interest rates can control for those demand-side factors, but they can't really do much about supply-side issues."

"As we've emerged from the pandemic the cost of transport and supply chains have been all messed up. There are also increasing energy prices because of the war in Ukraine as well as other increases in prices around grain and oil that comes from grain."

Is Australia likely to go into recession again?

So, the big question in all of this is whether Australia could be headed towards its second recession in recent years?

That was the question put to Treasurer Jim Chalmers in a press conference on Tuesday who responded by saying that while Australia wouldn't be immune from a likely global downturn, "It's not our expectation that the Australian economy will go backwards."

Ultimately, if a recession does take place it will be determined by the actions of the Reserve Bank of Australia, says Grudnoff.

"I don't think that a recession is necessarily going to happen - I think that it's far more likely in the US or UK, for example, at the moment," he says.

"It's not up to Jim Chalmers or you and me though. Really, it's entirely up to the Reserve Bank Board. If they put up interest rates too far and too fast they will push us into recession. If they don't, then there's no reason why Australia should fall into recession."

Saxena agrees that the more serious recession concerns are coming from overseas though, like Chalmers, he says that Australia could well be impacted by any fallout from abroad.

"Maybe we will be able to walk that narrow path where we avoid a recession, but my fear is that what happens internationally is going to spill over to Australia and that's not going to be through interest rates - in my opinion, it's more likely to be through exchange rates.

"I think next year we might see some of that play out where international economics start to affect our exchange rates and, in turn, our domestic inflation, which puts pressure on Australia and pushes us towards recession. That's one scenario that is more likely in my mind right now."

Get stories like this in our newsletters.

Related Stories


Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.