So you’ve probably heard a few people around the place talking about whether we’re headed for a recession. But what’s that actually about, and what would it mean for you?
The technical definition of a recession is when there is negative economic growth for two consecutive quarters (six months total). This means the output of the economy decreases over this time.
Most importantly, it means that the total amount of income received across the country decreases.
That’s because businesses tend to stop spending money, and the money businesses normally spend is with other businesses, so then the other businesses don’t make as much money, and it creates a chain reaction that flows right around the country.
The other thing that happens in a recession is that businesses slow down on hiring new people, which increases unemployment and means workers collectively are making less income. Then, because people have less money, they spend less money. And, because people normally spend their money with businesses, those businesses also make less money.
You can see how things tend to spiral downwards from here.
Is This Actually Going To Happen?
Well, this is always a tricky one. The economy tends to follow the ‘economic cycle’ where there are periods of strong growth, followed by slowing and then decreasing growth, and then the cycle starts again.
And we’ve seen for the last five years strong economic growth, which tells me things needs to slow down at some point.
But, in Australia we haven’t seen the technical definition of a recession since the early 1990’s, and we currently lead the world for the longest current consecutive period of economic growth at over 30 years.
This could have happened because we’ve just been lucky, or that the reason we’ve not had a recession is because of good financial decisions from the government and the reserve bank.
The truth is probably a combination.
But, even if we don’t have a technical recession we still feel the effects of a recession in other countries. We saw this in 2008/9 during the global financial crisis (GFC), where unemployment increased, the share market went way down, and wage growth slowed for a bunch of time.
What Could This Mean For You?
The two areas that impact young people the most from a recession is jobs and investments.
There’s not too much you can do about the job issue, other than try to work for a stable company in a growing industry that might be less impacted by a slowdown. But even then, it’s often hard to know everything that’s happening behind the scenes, which means you can still get caught out.
The other thing you can do is to upskill so that if there is more competition for jobs, that you’re the best candidate if you do have to change jobs.
On the investment side of things, there is one big thing to look out for, which is overextending yourself around investments.
I’m talking specifically about share investments, or things like Exchange Traded Funds (ETF’s) and/or managed funds that are invested into shares.
In the last global recession (the GFC in 2008), share investments went down by over 40% on average. This means that if you’d invested any money into the share market that you needed in the short term, you could end up in a tricky position.
I see a lot of people that invest money into the sharemarket that they’ve earmarked for upcoming spending. Things like your next holiday, a property purchase, or other things you plan to spend some cash on in the short to medium term.
If you invest money you plan to spend and there is a recession, it’s highly likely your investments will go down significantly, which could mean you’re unable to do the things you want with the money.
In 2008 it took over 7 years for the sharemarket to recover, and the general rule around how long you should be prepared to wait for an investment to recover is 7-10 years. This tells me that investing money into shares for things you want in the short term is super risky.
Take the time to understand your investments and the risk around them so you don’t get caught out.
Recessions suck. It’s hard to get a payrise, you might get made redundant, and investments will go down. But, if you’re smart there are ways you can protect yourself.
Build your skills so you remain highly employable. Grow your financial knowledge so you can manage risk in your money strategy. And build your money knowledge so you know what to look out for if a recession comes along.
Image credit: Erik Rosenberg
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.