There is currently a plethora of media coverage which is paying considerable attention to Australia’s economic state. One question on the minds of many Australians is whether our economy is heading or already in a recession. The following article will provide some clarity around Australia’s current economic position as well as ways to set yourself up for a strong financial future.
What is a recession?
The Reserve Bank of Australia suggests there is no single definition that describes a recession but the general consensus amongst economists is that a recession ‘occurs when there is a period of reduced output an a significant increase in the unemployment rate.’ Other sources define this phenomenon as a significant, widespread, and prolonged downturn in economic activity. Recessions usually last six-months or more and many countries use two consecutive quarters of decline in a country’s GDP to indicate a recession.
These periods can be extremely hard on individuals, households and families and may take years to completely recover from. It is the role of central banks and other policymakers to establish monetary policy to reduce the length, impacts and frequency of a recession. Recessions usually occur every 7-10 years and GDP is used to measure an economy’s stability and growth. GDP stands for ‘gross domestic product’ and is the total market value of all the finished goods and services produced within a country’s borders in a specific time period.
When GDP is falling, this indicates that consumer confidence is lower which causes households to be spending less on goods, particularly luxury items. Therefore, businesses are likely to hire less employees and reduce spending on growth and expansion. This means that company profits often decline, the value of shares decreasing and thus investors ‘feel less wealthy.’
Is Australia in a recession?
Inflation is high both across the globe and domestically which is a result of rising interest rates which have been imposed to curb fast economic growth and slow the economy down. The cash rate in Australia has been raised to 1.85% which means that debt is more expensive and thus borrowers are less inclined to borrow outside of their means. The US is in a technical recession as they have experiences negative growth across two consecutive quarters. Australia, however, has had two strong quarters of growth and by definition is not currently in a recession. This does not mean that consumer confidence and sentiment is not dampened as a result of the increased costs of everyday goods such as groceries, everyday items and petrol which has impacted many people across the country.
How to navigate a recession?
Although Australia is not technically in a recession, it is important for investors to be prepared for changing economic conditions which could be on the horizon. There are some key investing fundamentals which can be implemented to help you navigate market volatility and can help you ensure you remain focused on your financial future.
The first is to adopt a long-term approach to investing as historical trends show that stock markets have tended to follow an upward trend over the long-term. Diversifying your portfolio is one of the best ways to counteract market volatility as being exposed to many different asset classes, companies and industries across both domestic and international markets you are reducing how exposed you are to negatively performing investments.
Investing for the long-term is based on understanding and being comfortable with your risk tolerance. This will help to determine how long is long-term. If you are investing in high-growth asset classes it is suggested that investors follow a 5-7 year timeframe which will allow for the value of your investments to fluctuate and ride out market volatility before they are liquidated. To read more about the benefits of long-term investing, click here.
Another fundamental that investors can adopt is dollar-cost averaging. This essentially refers to making periodical contributions to your investment portfolio instead of purchasing everything using one lump sum. This will allow for the buy-in price of particular investments to average out overtime and can enable investors to capitalise on market downturn and take advantage of cheaper unit prices. To read more about dollar-cost averaging and how it could benefit you, click here.
If you feel worried or uneasy about current economic conditions and your financial future and wish to receive transparent and holistic financial advice, please click here to organise a complimentary consultation with an EPG Wealth adviser today.