Don't fear a recession
Written and accurate as at: Feb 17, 2023 Current Stats & Facts
When the media starts reporting higher interest rates and spiralling price rises, their next story will almost certainly scream the impending doom of a possible economic recession.
But what exactly is a recession, and is it all bad news for share market investors and the broader economy?
Most commentators believe a ‘technical recession’ occurs when there have been two consecutive quarters of negative growth in real gross domestic production or economic output, but there really is no strict definition. It’s more just a time when unemployment increases and growth falls.
Typically, most economists expect a true recession to last several years, as it did during the so-called ‘recession we had to have’ in the early 1990s and the mining collapse recession of the early seventies.
Economy
The Australian economy has been one of the world's most stable and consistent performers for several decades. However, in recent times, there has been increasing concern that the Australian economy may be headed for a recession. Despite these fears, there is no need to panic or fear an Australian economic recession.
Firstly, it is essential to understand that economic recessions are a normal and natural part of the business cycle. Periods of economic growth are always followed by periods of contraction, and this cycle has been a constant feature of modern economies. While recessions are always unwelcome, they are an expected part of the economic landscape, and Australia has weathered numerous such periods in the past.
Australia has several key economic strengths that should help it avoid a prolonged recession. Firstly, the country has an abundant and diverse range of natural resources, including coal, iron ore, and natural gas. These resources are in high demand from emerging economies like China, which is an essential trading partner of Australia. As long as global demand for these resources remains high, Australia's economy will remain robust.
Additionally, Australia's service sector significantly contributes to its economy, accounting for more than two-thirds of its economic activity. This sector has been resilient in the face of global economic uncertainty. Therefore, even if the global demand for natural resources declines, Australia's service sector should be able to provide a buffer against a recession.
The Australian government has several tools at its disposal to stimulate economic growth and avoid a prolonged recession. The Reserve Bank of Australia can reverse its expansive monetary policy and lower interest rates, making borrowing cheaper for businesses and individuals. Additionally, the government has various levers, including infrastructure spending and tax cuts, which should help support economic activity.
It is worth noting that the Australian economy has already weathered significant challenges in recent years, including the global financial crisis and the ongoing COVID-19 pandemic. Despite these challenges, the country's economy has remained stable and resilient, which suggests that it is well-placed to withstand any future economic downturns.
Sharemarket
What is interesting, though, is that share markets usually perform quite well during recessionary periods. The long drought-induced recession from 1981 to 1983 prompted the Australian share market to post its best-ever calendar year. It achieved a 60 per cent gain when the economy felt like it was coming to a standstill.
This happens because investors are typically spooked by the idea or the prospect of a recession occurring, and so they start to sell their shares before the recession and in doing so, put downward pressure on prices.
What causes prices to fall is the fear of an impending recession, not the actual recession itself.
Share markets, in fact, tend to rebound as the headlines talk of corporate layoffs and bankruptcies. Investors are then tempted to buy shares at their new lower prices in anticipation of profits improving as the economy invariably moves out of recession. By doing so, they push share prices higher.
While the prospect of an economic recession is always concerning, there is no need to fear an Australian recession. The country has several economic strengths and tools at its disposal, which should help it avoid a prolonged period of economic contraction. While challenges undoubtedly lie ahead, the Australian economy has shown itself to be robust and capable of withstanding significant economic shocks.