If you’ve watched any news recently, you will have heard talk about “recession”. Just hearing the word can strike fear in many. Having said that, most people don’t actually understand what a recession is.
Essentially, a recession is a measure of how a country’s economy is tracking. A more formal definition is “a recession is 2 quarters of negative Gross Domestic Product (GDP). Gross Domestic Product is a measure of a country’s spending. So, a recession is 6 months in a row of decreased spending across the whole economy.
At first glance, this may seem a bit innocuous. I mean what does it matter if people spend a little less money than they have over the last 6 months. But it’s not that simple. An economic recession is bad. Money flows around the economy. If someone earns money, they will spend money. This keeps the economy flowing and stimulates economic growth. If people stop spending, everyone loses as the economy contracts.
When people stop spending, businesses stop investing. When people stop spending, businesses stop employing people. people stop employing. If people lose their jobs they struggle to pay their bills – their mortgages and their gas and electricity bills.
When people stop spending money and economic indicators start to turn, governments have a few levers up their sleeves. There are a number of things they will try in order to stimulate spending. They will start with lowering interest rates. They may try printing more money.
Lower interest rates are helping to hold up the economy as people are still investing in real estate. There are incredibly great home loan products available at the moment. At the time of writing you can potentially get interest rates below 2%
When a recession hits, more often than not it is the middle and low-income earners that are disproportionately affected. It’s those living in the middle and outer suburbs. These people are my clients. They live in suburbs like Frankston, Cranbourne and Berwick. They are hard working people just going about their lives, trying to support their family and have a yearly holiday. When rich people and politicians make decisions, it’s these people that are impacted in a recession.
The economy goes through peaks and troughs. There are good times and there are bad times. We can’t have boom times forever. It’s important that we all take advantage of the good times to be prepared for the bad. Whilst we have record low interest rates you should look at options to reduce your repayments and potentially put aside some savings.
Will Bell Mortgage Broker is a mortgage and finance broker based in Melbourne specializing in residential home loans. Will is all about the average Australian understanding just enough of the broader economy to take action on your own personal economy. He is the host of the My Personal Economy Podcast.