The Australian Stock Exchange (ASX) plummet last Thursday saw a loss of over $60 billion wiped from the local stock market, which has raised concerns that another recession – or worse, another Global Financial Crisis (GFC) – could be on the horizon.
It’s no secret that trade tensions between China and the US are high, with the US president previously announcing that the Office of the US Trade Representative (UTSR) would add a 10 per cent tariff to another $300 billion in Chinese imports. It may be comforting to ‘blame’ the crash on the US China tariff war, but there are many factors around the world that are impacting consumer and shareholder confidence in the global economy.
The state of the Australian economy
The cash rate set by the Reserve Bank of Australia (RBA) is at an historical low of just one per cent, while unemployment sits at 5.2 per cent, 7 base percentage points from the RBA’s target of 4.5 per cent.
This, coupled with the recent ABS research confirming that consumer spending is as low as it was during the 1991 recession, is not comforting to economists and commentators.
In the most recent Standing Committee on Economics, RBA Governor Dr Philip Lowe stressed the importance of fiscal policy – including spending on infrastructure- in lifting consumer spending and reducing the unemployment rate.
Global financial markets are in an uncertain spot right now
The ongoing trade dispute, negative interest rate mortgages in Denmark, and historically low cash rates from central banks around the world including our own have all worked together to sound a possible recession alarm.
A recession could significantly impact Australians, irrespective of your direct involvement with the ASX.
You may be thinking ‘we survived the last GFC’, and you would be right. However, much has changed since the last Global Financial Crisis in 2008, and so it might be worth looking at your finances before anything has the potential to rock them.
What could a recession mean for you?
A recession can rear its ugly head in many ways, predominantly in the areas of employment, investments, new business opportunities and real estate value.
If Australia were to enter a recession, small business owners may not have the funds to borrow or start new companies, as government funding for innovation is restricted. Real estate values can also fall drastically, and families who cannot afford mortgage repayments could be forced out of their homes.
During a recession, unemployment rates can rise dramatically. Business owners will often reduce employee numbers to save on wages, and new ventures may be seen as too risky, meaning less new positions are likely to be advertised. Superannuation could also be impacted, as share markets are one of the main drivers of strong performance.
How can you prepare for a recession?
If you’re concerned there is a recession on the horizon, the best thing you can do is to review your financial situation in detail.
Hiring a financial advisor can be advantageous, as you may find an insider view of the market and possibly a deeper understanding of where you stand financially.
When it comes to your personal finances, there is no one-size-fits-all model. Lenders provide personalised rates and charge different fees for a number of products. Financial products each have their own affordability tests, that vary based on the lender, and lenders can offer a plethora of promotions with disparate expiry dates for each product or product variation.
The key is to make sure you compare personal loans, home loans, credit cards or savings accounts in-depth before you sign on the dotted line. Yes, interest rates are at an all-time low, but if Australia were to enter a recession, you could lose thousands in property value, or struggle to meet your home loan repayments.
If you’re concerned by what you pay now for a home loan, it could be an ideal time to find out whether your interest rate is the best it could be, and if it isn’t, whether refinancing is a suitable option.