What Is A Recession?

the Order Kerni Whoalbury and a waddery woman. And before we get started on She's on the Money podcast, I would like to acknowledge the traditional custodians of the land of which this podcast is recorded on a wondery country, acknowledging the elders, the ancestors and the next generation coming through as this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow.

To help us all feel a little less afraid, today, we're breaking down exactly what a recession is and what it might mean for you, my name is georger King and joining me as she does each and every Wednesday, is, of course, Miss Victoria divine. Can you please provide us a little context as to where things are at right now and why we're dedicating today's episode two recession.

it was a while ago, because guys, it's August. It has been a few months since the middle of June. And in the middle of June, we know that the share market officially became a bear market, which, for those of you who haven't listened to our bear market episode means that the share market has dropped a minimum of twenty percent from its twelvemonth high, so that can be

really stressful. And at the end of the day, we've just gone through COVID, which is really significant, and there's a whole heap of indicators that are telling us that we are headed that way. Interestingly, though, I said before we started recording this to you, Annanna Lisa, our producer for those of you who are following along at home, an absolute legend.

Guys like, there's twenty five percent. Hey, hey, George, let's play Russian Roulette. We'll spin a gun, twenty five percent chance you'll be like, oh, that's pretty hard.

really stretched thin. None of us are feeling good about it. There needs to be some kind of reset. That's what a recession, unfortunately does, as long as it is a time of you know, quite significant economic downturn, which means some pretty negative stuff happening, and yes, people will lose their roles and it can be really upsetting. The end of the day, it's kind of like an economic reset in a way, and it's something that needs to happen. So our economy can keep moving forward.

in spending. But also think about it, if cash is going to be costing us more, our mortgages are costing us more, what are we.

going to be. You know, it has the same indicators and markers, but at the same time the situations are so different that you can't really define it as this

is going to happen because you also can't predict it. Yes, we can see some indicators and we're going towards that, but it's kind of like doing an MRI and some things showing up oddly and you go, oh, that needs some more clarification or we need to look more deeply into that, because there's so many more tests we need to do, but we're at that point where there's not many other tests that could tell us and unfortunately, Yeah, that's where we're at.

definition of a recession to find. So be this technical recession. Correct me if I'm wrong, but I feel like it's ringing some bells from when we were at the very start of the premier twenty twenty twenty, I feel like we were in a technical recession.

and slightly worse than most economists had actually predicted. So again, we can't predict this stuff, So yes, we were in a technical recession because of what was going on, But you know, we came back from that pretty quickly. We didn't slip into that full recession period of time. I mean, it was still a bit of a what would you call it a circus. However, I think that's a really good pull up. At the end of the day, we were technically in a recession and now we are worried

about heading into one again. Recessions, I feel like people are really dramatic about them, obviously for good reason. Please don't get me wrong, I'm not downplaying how impactful they can be, but people think that they last for years and years and years. What's the average period of time that a recession last? For George King, it's eleven months, all right. I'm glad I had this conversation with you off air, But I think the average Joe would say, oh,

full of years this that the other like. They wouldn't think that it's literally less than a year that a recession usually lasts in saying that how long it impacts a community could be way longer than that, because I mean, George, if we lost our jobs and couldn't work and then we're trying to get back into a workforce where it was quite competitive. That is going to last longer than

eleven months. The next is a sustained period of week or negative growth in real GDP, which is called output that is accompanied by a significant rise in the unemployment rate. That's another definition for a recession. So many other indicators of economic activity are also weak during a recession. For example, levels of household spending we talked about before you're going to lack, maybe tie your purse strings a little bit tighter, and then investment by businesses is usually low during that

period of time. In addition to that, the numbers of households and businesses that are unable to pay back loans are usually unusually high, and a number of businesses unfortunately will close down. So that's not that fun. But then if we look at the unemployment based definitions, which I think are really important because at the same time as talking about, you know, the share markets, and I want to say, I don't have a lot of sympathy for people who are worried about the share markets. And I

don't mean that in a really harsh way. I mean it in a you need to be better educated because this is a period of time where you know, on she's on the money. Literally the last three years I've been harping on about there are ebbs and flows in the market. Sometimes you're going to be like, gee, I got seven percent return this year. That's sick. Sometimes you're going to have a negative return. That is a period of time that we are about to go through or

could very likely go through. And that's where we kind of need to have our wits about us, not make emotional decisions, and not be so worried that when our share portfolios start to downturn we pull that money out, because, as we've said a million times on the podcast, the only way you lose money in shares during a period of economic downturn a couple of them. Actually, I need to be a little bit more specific. I mean, the business that you own could absolutely go bankrupt, and you're absolutely,

you know, in a bit of a pickle, George. That's why we diversify and never put all of our eggs in one basket.

you don't trigger a sale. So that sounds quite I don't mean it to be so complicated, but essentially, Gee, if you've got a share today that is worth one dollar each, and you've got ten of them, you woke up tomorrow and you're like, oh my gosh, Victoria, I'm so stressed. I looked at my share port folio. It's now worth five bucks. You still have those ten shares. What you're doing is accepting five dollars for the sale of those because you're anxious and need to get out

of it. Whereas if I'd sat you down and said, all right, g do you actually want to sell ten of your shares for five dollars when you paid a whole ten dollars for it? Or do you want to wait for the market to recover and you'll be like all right. Makes a bit more sense if we put it in perspective. And something I've been seeing all over Instagram, which I love and I've quoted on the show before, is if in doubt, zoom out, stop looking at what today's returns are Stop looking at the last month or

even the last year. Zoom out. Look at the last five years in the share market, look at the last ten years. If you want to feel really secure, look at the last thirty years the Australian share market. If you look at any thirty year period of time in

the Australian share market never had a negative return. If you look at it in a thirty year chunk, that makes you feel so much more secure about things like your superannuation, right because if I say, gee, how much more time have you got your super invested for, you go, oh, Lenny, plenty of time. But if you looked at it tomorrow and didn't have an education about that, you'd be like, oh my gosh, Victoria, I'm so stressed. Should I switch

it to cash? And if you switch your super cash, what are you doing crystallizing a loss and you're switching that money into a cash option so that you can quote, I'll invest when the market a better cool, but you won't be able to afford as much as what you had before if you're investing at a different time when the markets make you feel more comfortable. So education is the most important thing. That we can have when going

into a recession. Yeah, okay, I would like to say rantover, but we're definitely not done.

world of love and war. This phase ends with a peak in economic activity. So we got to this just before COVID, right, like everything increasing in price. Anyway, we've just gone through this again where obviously there's been a fair bit going on in the world. Russia invaded Ukraine, which meant things traveling around the world and goods and services weren't as easy to get hold of. Oil has gone through the roof in terms of pricing, and is obviously increasing how much it's going to cost us to

put fuel in our cars. So that was kind of the peak where everything was at its most expensive. In contraction. Households then start demanding fewer goods and services, businesses start reducing the number of workers that they employ, and growth in wages and prices starts to slow. So this is what we're seeing at the moment right in our community. We're talking to people who are like, I asked for a pay rise, my business said they couldn't afford it,

and like that's a legitimate reason. It's not oh, you don't deserve it, it's oh, actually things have started to stagnate. Maybe they're not making as many sales as they used to, or they're not going through in a period of economic growth. And then this phase ends with what's called a truff in economic activity. And this is kind of like that truck fleck. It's like a bucket. It goes down, but it always has a side to come back up, which

I think is really important. We're not absolutely in the bin, George, but it's a period that we go through. It's kind of like a cycle, and once we get back to the start, we have to go round the wheel again. It happens, and the economy resets itself. And I think that once we feel a little bit more comfortable with that, we're not so what would you say, doom and gloom. We're not say oh my gosh, this is the end of the end.

and not have a recession. But I don't think there has been in the history of ever a recession without having a bear market, So like it goes one way and not the other.

which ultimately impacts small businesses. People also become a lot more conservative during this period of time, especially banks, which then puts a lot more pressure on small business because banks are far less likely to lend to a small business because they're like, oh, we're going through a recession, Georgia, do you really want you know, a fifty thousand dollars business loan to start a candle business? Like, is that

the best time to do that? So it ends up impacting a lot of people, not necessarily just you know, consumers. It impacts small business, it impacts big business, It impacts business growth in general. But from my perspective, yeah, bear markets do a company recessions. But I think it's important to know that one is not effectively a predictor for the other, but more, you know, an interesting I won't say coincidence, because they exist, but it's interesting to see

the relationship between the two. At the end of the day, when we look at a bear market and stock prices are falling, it means bad things for businesses and people who are on the share market, but from my perspective, even worse things for small businesses who aren't on the share market, because they're usually the ones that are more seriously hit. Because most small businesses usually have some level of luxury afforded to them. So it's not that they

are a luxury business. It's that George, if you're buying off a small business, it's very likely it's not your fuel and it's not the food that you put on the table. It's very likely a luxury that you can go all right, it's not in the budget for me this month. I can cut it out. And so we're usually putting a lot more stress on small businesses rather than you know, the big dogs in the market, because you still need to put food on the table. It still needs to get to work.

felt as badly. We had increases in productivity from the manufacturing sector and Australia moved from the old model to the new model of production, so we had trade protection, particularly from tariffs that were implemented by the government at that time, and they were instrumental in the wealth of the manufacturing sector. So we were not as hardly hit. Yes, technically we were in a recession, but we were not hit nearly as hard as you know the US was,

where it was very dire. So next recession, Georgia king was in nineteen seven three to nineteen seventy five, and there's a few factors here, but essentially the nineteen seventy three oil crisis sparked it and it caused prices to spark, which we are outraged about at the moment because obviously putting fueling cars is very expensive. Thankfully, we live in

a world where there's lots of alternative sources. Now, historically there were not, and according to government figures, inflation topped thirteen percent for the year of nineteen seventy three to nineteen seventy four, and by nineteen seventy four Australia was technically in an economic recession that was probably perpetuated by the failure of the Whitlam government to effectively manage the

Australian economy. And you know, obviously that was another factor in the crisis that ended the government's term in office at the end of nineteen seventy five, where we got a new government and you know, things started to bounce back. Then Georgia, we have another recession that occurred in nineteen eighty two to nineteen eighty three, and this was experienced by lots of different economies, particularly in the US. In Australia, the effects of tighter monetary policy and weak global demand

were compounded by drought. So that wasn't great and that was referred to as the quote deepest post war recession that Australia had felt, and again largely because it coincided with the drought, which obviously in a very farm heavy production country, obviously impacted us very very significantly. And then we move on to quote keating to the recession Australia had to have, and that was in my year of birth,

Georgia King. I remember it fondly from nineteen ninety one to nineteen ninety two and the early nineteen nineties recession mainly resulted from Australia's efforts to address excess domestic demand, curb speculative behavior in commercial property markets and reduce inflation. And as I said before, Keating said, it was the recession that Australia had to have.

going to look like on him? But literally, there are a fair few different opinions floating around, right, And as we always say, with she's on the money, because this is coming from my perspective as a financial advisor and watching the markets and going okay, cool, this is where we're heading towards. This is what I see. We've got an episode coming up after this because we decided to split this one into two about how to prepare yourself

and what's the worst thing that can happen Georgia. If I prepare our community for a recession, then it doesn't happen, then everyone's just financial physicially exactly. So I think it's better to be prepared than can letely underprepared. And as much as you know, it's really nice that he's saying, oh, I really don't think that we'll go into a recession, you know, not a thing. All the indicators are showing me that we are, and our community is asking us

a lot of questions about what does this mean? How can I be financially secure? I'm really stressed, like I don't want that for you guys. So let's treat it as though we are headed towards one and we will financially prepare ourselves to be in the best possible position. Then if it doesn't happen.

not the case. Recessions are cyclical, like this is how the market works, this is how it ebbs and it flows, and they know that, which is why Georgia, every single parliamentarian in Australian government has a share portfolio because they know that that happens. They know how this works. They're all property investors, they're all share investors, they are all

in situations where they know how the market works. But it's so much better to mudsling and throw shade at the last government so that the current government gets a whole heap of praise. Right, So I feel like it's branding. But also since the Great Depression, governments around the world have adopted countercyclical fiscal and monetary policies. That's a mouse that I've written down to ensure that the run of the meal recessions don't turn into something much more damaging

to their life long term economic prospects. Some of these stabilizers are automatic, like increased spending on unemployment insurance that makes up a fraction of lost income for off laid workers. Others like what we're talking about, a lot in cheese on the money at the moment, like rate cuts, are designed to prop up employment and investment and require the decision of a central bank. So in Australia that central

bank is the RBA. We always talk about it. At the time of recording this, George, We've just had an announcement recently. The RBA is rising rates to one point eighty five percent, which lowest growth outlook, but at the same time is happening to put us in a better financial circumstance. I think a lot of people look at this and go, I can't believe this is happening to us. This is awful. I'm never going to get into my

first home. This that the other like, the reason this is happening is far bigger than an individual getting into their first home. It's to make sure that future individuals can get into their first home. That property stays an asset that can still be bought and sold, like the world would go rife if we didn't go through this process. And essentially, as much as it sucks and as much as it increase our interest rates, they're doing this to put our society in the best possible position. And I

think we need to remember that. And we need to also remember that the politicians that govern our country are the voice of their party. It's not just elbow going I want to do X y ZX, so therefore we're doing it. There's an entire party behind him making decisions. It's not just our treasure a gym turning around and being like, oh I don't reckon it's this. It's a plethora of teams behind him coming up with Okay, well, this is what that take looks like. This is our research.

This is the conclusion we've come to. So I think it's important to differentiate a bit of mud slinging, but also what is the best thing for our economy right now? No politician wants to have things go downhill on their watch, so I'm not surprised that they're showing away from embracing the topic.

severe recession that occurs in one or more economies. So sometimes, gee, when a recession is announced or you know, we're officially in one, it might only be one country or another.

So earlier we were talking about how we were officially in a recession in Australia in the middle of twenty twenty right, you said, I remember that, but what you might not remember is it was announced in other countries three four five months earlier than that, and the US were in that far before us, and we weren't even sure if Australia would be in a and then we obviously made it there and we came out relatively quickly.

So it really depends on where you are as to how significant a recession is or you know, how impactful it is. But a depression is kind of like the way worse version of a recession, where things are pretty dire for a lot of people.

hard to get into or really hard to sell. Interest rates are going to increase, investments are going to decrease, student loans are going to feel like they have a choke hold on us because you know, we look at our help or hex debt and you go, oh, like, the cash rate has increased, therefore inflation has increased, Therefore the amount of money that my debt has increased by

each year. Even though there's no technical interest rate on our hex debt, there's just a rise in CPI still impacts us right, like we're talking about it in our community. It's not exciting at the end of the day. Unfortunately, you might lose your job during a recession, which makes sense because unemployment levels are on the rise, So not only are you more likely to lose your current job g it then becomes much harder to find a job replacement. So you don't see a lot of people during a

recession moving roles. People usually just wait at our staple. Yeah, and I think it's solid advice to go, well, what should I be doing? I would be thinking about what type of industry I'm in. There are going to be industries that aren't nearly as hard done by. Let's say you've got a job at Woolly's very unlikely that that is going to be impacted because at the end of the day, what is willis it is a supermarket. People

need to put food on their tables. These commodities aren't really going to go anywhere if you are you know, I don't want to dramatize and give terrible examples, but Jess has talked about it on the show before. Jess was made redundant from her real estate job when the

pandemic hit, Like remember her talking about that. That made sense because as the pandemic hit, there's less necessity for people, you know, with their hands on the ground in property because property isn't moving as quickly as it was before. So they're trying to lower their cost because there's less properties being sold, which means there's les commission going around the real estate industry, which means there's less money to pay people. So they're making decisions that are actually in

line with their business. And from a bird's eye perspective, you go, that makes sense to strip out costs, But unfortunately that does mean that our community could be impacted. Interestingly, in a lot of the articles that I read in the research I was doing for this episode to put lots on the table. Retail and beauty was put on the table as you know an area that you know

could be seriously affected. I think I've mentioned it to you on the podcast before recession, So I find that's so interesting to bring up now because one it makes me feel more educated too. You guys will find it relatively interesting. But if you missed it, with the recession threatening,

the lipstick effect is going to start kicking in. And although it comes in a few different forms, it's actually when during an economic downturn, although spending in the economy tends to decrease or not grow as much as usual, there's an uplift inserting categories of small luxuries because you go from being like, oh my gosh, you'll get a facial you're going to pull that in, but you might go and buy a lipstick to still treat yourself right.

So it's a very very interesting phenomenon where there's actually a report by the NPD Group that says the sales of lipstick are rising more than twice as fast as any other product during a recession.

seems to thrive. Biotech seems to thrive, drug manufacturing sure seems to thrive. I would argue that that makes a lot of sense to me because a very common theme that I found throughout COVID was a lot of my friends, including me Georgia, went back on antidepressants because we're just going through a bit of a tough time.

nearly as dramatic as what happened in the US. So the Global Financial Crisis from two thousand and eight to two thousand and nine was when international finance markets and banking systems experienced a period of extreme stress and volatility. At I believe it was the start of two thousand

and eight. The damage done to the financial markets and the banking systems for many other countries, then triggered large scale losses of economic activity and large increases of unemployment, and for many countries it was actually the most severe

recession since the Great Depression. However, the Australian economy actually fared much better than most because it had a really sound financial system and a relatively large exposure to the buoyant Chinese economy and strong stimulus for small business to

cushion it from the global downturn. So that was from my perspective obviously benefit of being here in Australia, and Australian GDP only declined in one quarter, although the unemployment rate increased to close to six percent and the underemployment rate rose sharply. So that said, gee, it actually can be traced back to one particular financial stress in the US.

And I won't go into this too much because I think it one I think is really interesting and I definitely want to go into this, but you guys might find it really boring. But financial stress is actually peaked following the failure of the US financial firm called the Lehman Brothers in September two thousand and eight. Together with that failure or the near failure of a range of

other financial firms around that time. It triggered what we would call an absolute panic in the financial markets globally because people started to go, well, if Lehman Brothers, who were one of the biggest financial institutions in the US, can be really untrusted, what is going on? Like, that's really stressful. That's like me turning around to you, George

and being like, comebank, yeah gone. You'd be like what And thankfully we live in a country where a lot of our banks are underwritten, Like there has to be something very very dramatic to happen for our banks to go to absolute junk. And the reason for that is they are underwritten by the government. And I promise you if anything happened to any of those banks, because of how much Australia relies on them. I mean, we have the big four banks. If you're not with Combank, you're

with NAP. If you're not with NAB, you with Westpac. If you're not with west Pac, you're with.

was in the US. So in the US it was far more dramatic, and obviously Liman Brothers failing was really scary, but the actual catalyst for the GFC was falling US house prices and a rising number of borrowers who were unable to pay their loans. So Lehman Brothers obviously played

pretty significantly into that space. But essentially TLDR lots of banks gave lots of people mortgages that shouldn't have had them, and what happened there is lots of people couldn't pay it back, and if you can't pay back your loan on a grand scale, the.

not doing the right thing that led to that. So George, it makes sense in that light if I say lots of people couldn't pay back their mortgages, and then you look at Lehman Brothers, who were an investment bank. They had subprimed mortgaged backed securities, which means they basically backed a whole heap of mortgages.

But that kind of was that stagnation, right, You're taking your investment out of the share market, which could recover. And if we look at the share market now and we zoom out and have a big look at what that looks like, the share market has absolutely recovered. However, people get scared, they transfer their wealth, and it makes sense. But what we need is an education to put us in the best possible position. Great today, v Lord, But was there anything we can do outside of here to

kind of increase our education? Any hot tips you have for us to take away today? I mean, you could head to Wikipedia and read a whole here of stuff. You could head to investor Pedia, you could head to the RBA website. You can read more on the news, but no one's going to do that. What I recommend from a personal perspective is watching the movie, the twenty fifteen movie, George, The Big Short.

Big Short is a pretty good movie. It really humorously kind of outlines the complicated events that led to the Great Recession.

an investment or a financial decision. And we promise Victoria Devine and She's on the Money are authorized representatives of in Focused Securities Australia Priortarily Limited ABN four seven zero nine seven seven nine seven zero four nine, APHA Salt three six on two three. See you on Friday, guys. M