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How deep will Australia’s recession be...

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How deep will Australia’s recession be?

and what it means to you?

Introduction

This is our 4th update since the COVID-19 crisis started. The feedback we are getting is that our SFP insights have been very welcomed, and they have represented a voice of reason in an ocean of fear. Sydney Financial Planning has been operating for 31 years. In 1991 during the recession we had to have, we were there to help guide our clients through this tough period. In 1991, 2001, 2008 and again today in 2020 when the financial markets fell dramatically, we continue to be here for you, guiding and advising you through a rough patch.

Is this normal?

Looking forward, is this just a normal recession we will go through or is it worse and deeper? Or is it short-lived? Will we get back to normal quickly? When will the financial markets return to normal?

At the time of penning this article, the Australian Share Market has staged a
staggering 20% recovery. So, congratulations to all our clients who did not panic. Congratulations to our clients who took our advice, and took advantage of this fantastic opportunity to buy in at a 40% discount.

A great proportion of the working population has never known a recession in Australia, and others will be haunted by the last in the early 1990s. This time around, I think Australia is in for a different experience to what we’ve seen and known before – and that’s not entirely a bad thing.

The Australian government has, rightly, sacrificed economic activity in the name of health in response to the COVID-19 crisis. It’s not alone in this, as you’d well know, major economies worldwide have done and are doing the same thing, albeit in different ways.

An unfortunate victim in this is Australia’s almost 30-year run of economic growth as we are experiencing our first recession since 1991. The March quarter is most likely going to be negative, and the June quarter will see a big hit to economic activity thanks to the
virus-driven shutdowns, possibly in the order of 10 percent. In other words, our economy will shrink considerably as this virus runs its course.

Again, Australia won’t be alone in this, a global recession is likely as major powerhouses like the US and China factor in the huge economic hit of social distancing, isolation measures, and a virtual shutdown of regular activities, businesses, and services that are not essential.

How will this affect me?

There is a range of factors Australians will feel as we move through the recession period, and a big one will be how tough the jobs market is. There will be much higher unemployment, it will be harder to switch jobs, and it’s reasonable to expect more redundancies and terminations as the crisis continues.

This leads to a loss in income and falling wages, which reduces the spending power of affected Australians. Compounding that, even for those who are holding on to their jobs, uncertainty will rise – people worry about the future, they worry about their income, they worry about their employment prospects. That will impact spending patterns, and how much people are willing to part with beyond the essentials.

It’s worth pointing out some of the potential opportunities for our investors who are prepared to take a long-term view. For one, interest rates will be lower, the official cash rate is currently sitting at the all-time low of 0.25%. This will mean it’s cheaper to service a mortgage.

The residential property market is also likely to take a hit, which could provide lower entry points for people who have struggled – particularly in cities like Sydney and Melbourne – with affordability. The same logic applies to shares. Although the market is currently more volatile, for those with a long-term outlook, there are opportunities to find value at a lower price point. This especially applies to all those reinvested dividends, if you’re in the accumulation stage.

Finally, what we think will be different about the recession before us and those Australia has seen before, is that the current crisis is not the result of a bust after a boom. This is an enforced shutdown and a significant disruption – it was not caused by anything fundamental in the Australian economy. Because of that, we are positive that once the virus is under control, we can recover and reach a more normal functioning in a quicker way than we have before. Adding confidence to this is that government and financial support programs – notably the wage subsidy and debt payment holidays – have been applied early and aggressively and should help protect many businesses and individuals so that the economy can bounce back reasonably quickly once the virus is under control.

Stay the course and keep healthy. This too shall pass.

 

Advice team of Sydney Financial Planning

 

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Article by Michal Bodi | Senior Financial Planner

 

General Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.

Photo by Casey Horner on Unsplash

 

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