After a “bloodbath” in the market, experts warn that America is on the brink of recession. But what is a recession and how will it affect Australian workers?
The global battle against rapidly rising inflation took an ominous turn this week, with the US Federal Reserve raising interest rates by 75 basis points on Wednesday, sparking market chaos.
This is the largest rate hike the United States has seen in more than three decades.
Thursday’s stock numbers looked like a bloodbath, with the Dow Jones plunging 2.6%, while the Nasdaq Composite fell 4.1%.
These are just two examples of one of the biggest selloffs in recent memory, which is expected to send shockwaves through other markets around the world, including Australia, still reeling after similar scenes of carnage on the ASX on Tuesday.
This has prompted pundits to worry about the United States sliding into recession, with the global financial crisis of 2007-2009 fresh in the memory of millions of Americans.
Morgan Stanley CEO James P Gorman went so far as to say he believed the risk of recession was 50-50.
“It was inevitable that this inflation would not be transitory, it was inevitable that the Federal Reserve would have to act faster than it anticipated,” he said earlier this week.
The warning shots, in the US and here, now have millions of Australians asking: what is a recession, what does it mean for Australia and, more importantly, what does this mean for me and my family?
Hey Siri – what is a recession?
“A period of temporary economic decline during which commercial and industrial activity is reduced, usually identified by a decline in GDP in two successive (financial) quarters.
The above is the definition of recession, according to the world’s most widely used smartphone research tool.
The executive director of the Center for International Economics, David Pearce, puts it more simply.
“In a recession, production doesn’t go up, sales go down, real wages go down – the economy basically slows down and doesn’t grow,” he told news.com.au.
“It is understood that this is the whole economy. In reality, however, different parts of the economy are doing different things at any given time. Your view of a recession may depend on your position in the economy within your industry.
Although they seem frightening, the expansions and contractions of any economy are inevitable. Recessions are an integral part of the normal cycle of national economies.
Australia itself last experienced a recession in 2020 due to the effects of the pandemic and lockdowns, but quickly rebounded at Christmaswell ahead of the normal length of a recession, which lasts an average of 11 months.
Why is America threatened with recession now?
The US Federal Reserve’s decision to raise interest rates (essentially the “cost” of money) followed the US Consumer Price Index (CPI) report in May, which showed that the inflation (the cost of living) had reached 8.6%.
Rising interest rates in turn increase the value of cash to help combat soaring prices – but it also makes it more expensive to borrow money, meaning mortgage owners and owners companies have to tighten their collective belts, which often causes a ripple effect in the wider economy.
This can sometimes lead to a recession, as less money is circulating in the broader market.
Induced by the pandemic market slowdown, disruption of trade due to Russia’s Ongoing War in Ukraine and in general global sourcing the shortages all helped push inflation in the United States to 8.6%, the highest rate since the 1980s.
Add to that a weakening US construction sector, falling mortgage payments and deteriorating retail sales figures, and you have a country on the brink.
“It’s big storm clouds here. It’s a hurricane,” said Jamie Dimon, CEO of JP Morgan Chase.
“This hurricane is right out there on the road coming our way. We just don’t know if it’s Minor or Superstorm Sandy… and you better be prepared.
Does this put Australia in the crosshairs?
Being the largest stock market in the world, bad news in the United States is bad news for the rest of the world.
Australian interest rates have already risen sharply after being held at record highs, with this number expected to increase exponentially in the coming months.
Mr Pearce warned there were a number of “high risk factors” that could push Australia into recession in the coming months.
“Inflation is very high, so the need to slow the economy by raising interest rates creates a risk that we slow down too much,” he said.
Mr. Pearce noted that, as in the United States, bloated housing, high cost of living and energy deficiencies put the economy in a fragile place.
“The international economy also presents a risk factor – we’re in a strange space in Australia at the moment where interest rates have been very low, there’s a lot of pressure on the economy from different directions at once. and those pressures do different things.”
What will this mean for me?
Despite the bleak international outlook, Mr Pearce said Australia was in a relatively strong position to weather the storms.
“A traditional problem with a recession is that people lose their jobs and become unemployed – but right now we have low unemployment and all the labor market indicators show we are headed in the right direction,” he said. he declared.
Even so, he warned that when it came to recessions, “generally the ability of an average household to afford the kinds of things they like would decline.”
“Another much more indirect aspect is that if the stock markets go down it will affect people’s retirement in the long run – in the GFC we have seen a lot of people about to retire needing to add another year to their lives professional.”
Mr Pearce warned that long-term solutions needed to be implemented if Australia was to avoid further short-term economic problems.
“Some of the pressures on the Australian economy demonstrate structural weaknesses,” he said. “You think of the energy market, for example – there is a vulnerability there.
“It’s something you really have to be careful about – decisions have to be made to put things in place for the long term rather than solving short-term crises.”
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