After a “bloodbath” in the market, experts warn America is on the brink of recession. But what is a recession and how will it affect Australian workers?
The global battle against soaring inflation took a worrying turn this week, with the US Federal Reserve raising interest rates by 75 basis points on Wednesday, sparking market chaos.
It was the largest rate hike the US has seen in more than three decades.
Thursday’s stock market data was akin to a bloodbath, with the Dow Jones plummeting 2.6 percent while the Nasdaq Composite fell 4.1 percent.
These were just two examples of one of the steepest sell-offs in recent history, which will send shockwaves in other markets around the world, including Australia, which are still reeling. similar scenes of massacre at the ASX on Tuesday†
It has sparked concern from experts that the US is sliding into recession, with the global financial crisis of 2007-2009 fresh in the minds of millions of Americans.
Morgan Stanley CEO James P. Gorman went so far as to say he believed the risk of a recession was 50-50.
“Inevitably, this inflation was not transient, it was inevitable that the Federal Reserve would have to act faster than they predicted,” he said earlier this week.
The warning shots, both in the States and here, are now asking millions of Australians: What is a recession, what does it mean for Australia and, most importantly, what does it mean for me and my family?
Hey Siri – What’s a Recession?
“A period of temporary economic downturn in which trade and industrial activity decline, generally characterized by a decline in GDP in two successive (financial) quarters.
The above is the definition of recession, according to the most widely used smartphone search tool in the world.
Director of the Center for International Economics, David Pearce, puts it simpler.
“In a recession, production doesn’t grow, sales fall, real wages fall — the economy essentially slows down and doesn’t grow,” he told news.com.au.
“Obviously, it’s the entire economy. In reality, though, different parts of the economy are doing different things at any given time. Your view of a recession may depend on where you are in the economy within your industry.
Although they sound scary, expansions and contractions of any economy are inevitable. Recessions are part of the normal cycle of national economies.
Australia itself last had a recession in 2020 due to the effects of the pandemic and lockdowns, but recovered quickly at Christmaswell ahead of the normal duration of a recession, which lasts 11 months on average.
Why is America now at risk of a recession?
The US Federal Reserve’s move to raise interest rates (essentially the ‘cost’ of money) was in response to the US May Consumer Price Index (CPI) report, which found that inflation (the cost of living) .6 percent had reached.
Raising interest rates in turn increases the value of cash to help fight rising prices – but it also makes it more expensive to borrow money, meaning mortgage and business owners must tighten their collective belts, often creating a ripple effect in the wider economy.
This can sometimes lead to a recession as less money moves through the wider market.
Pandemic-induced market decline, trade disruption due to: Russia’s ongoing war in Ukraine and in general worldwide offer deficits all played a part in pushing U.S. inflation to 8.6 percent — the highest rate since the 1980s.
Add to that a weakening US construction industry, dwindling mortgage payments and deteriorating retail numbers, and you’ve got a country on the brink.
‘There are big storm clouds here. It’s a hurricane,” said Jamie Dimon, CEO of JP Morgan Chase.
“That hurricane is right there on the road heading our way. We just don’t know if it’s a minor or Superstorm Sandy…and you’d better brace yourself.”
Does that put Australia in the line of fire?
As the largest stock market in the world, bad news in the US is bad news for the rest of the world.
Australian interest rates have already risen sharply after being held at record lows, and that number is expected to rise exponentially in the coming months.
Pearce warned there are 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 US, inflated housing, high cost of living and energy shortages placed the economy in a fragile place.
“The international economy is also a risk factor – we’re in a strange space in Australia at a time when interest rates have been really low, there’s a lot of pressure on the economy from different directions at once and that pressure is doing different things.”
What will it mean to me?
Despite the bleak international outlook, Mr Pearce said Australia is in a relatively strong position to weather any storms.
“A traditional problem with a recession is people losing their jobs and unemployment – but right now we have low unemployment and all the labor market indicators show we are on the right track,” he said.
Still, he warned that when it comes to recessions, “usually the ability of the average household to afford the kinds of things they want would decline”.
“Another, much more indirect aspect is that if the stock markets fall, it will affect people’s retirement in the long run – in the GFC we saw a lot of people who were about to retire and have another year on their hands. to add to their working lives.”
Mr Pearce warned that long-term solutions must be implemented if Australia is to avoid further short-term economic problems.
“Some of the pressure on the Australian economy is showing some structural weaknesses,” he said. “You think, for example, of the energy market, there is a vulnerability there.
“That’s something to really watch out for — decisions need to be made to put things in order for the long term rather than solve crises in the short term.”
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