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Mandy Money

Mandy Money

what actually is a recession?

Australia, along with almost every other nation, is currently experiencing a recession. But what does that mean, and why is it a bad thing?

A period of economic downturn

A recession is a period of economic downturn. Its technical definition is two successive quarters of negative GDP growth, but what does that actually mean?

GDP (Gross Domestic Product)

Each quarter, the economy produces a certain amount of goods and services – think haircuts, bread, clothing etc.

When we add together the value of all these goods and services produced, we get a figure known as GDP (Gross Domestic Product). For context, in Australia GDP was $343.5 billion in Q4 2019.

Economic Growth

Over time, we generally see GDP increase – we call this economic growth, and it’s a good thing.

However, with some catastrophic events, such as the 2008 Global Financial Crisis, or more recently the coronavirus, we can see a prolonged decline in GDP – this is the trigger of a recession.

Is this a bad thing?

Falling GDP has many negative knock-on effects. Declining GDP usually causes businesses to close, unemployment to rise and wages to fall, which not only means less money in the economy, but less people are actually able to afford their livelihood.

Less money means less investment spending, less consumer spending, and more reliance on government,  which ultimately causes:

  • A fall in housing prices
  • Declines in the value of shares
  • More government debt (which can result in higher taxes)

And ultimately people with lower incomes, livlihoods and a lower standard of living. Not great.

"Declining GDP usually causes businesses to close, unemployment to rise and wages to fall"

… But don’t get too worried

While Australia may currently be in a recession, Australia has a very resilient economy and the government continues to look to support it. While times may be tough, and the outcomes we have discussed above are fairly negative, Australia is well positioned to pull through with relatively minimal hardship.

This was a fairly heavy economics piece, but we’ve got plenty more mandy with a lighter mood:

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