In the thick of US tariff announcements, trade wars and global stock market volatility, the big R word has been on everyone’s mind 😬

Honestly, “recession” is a scary word in any context. Recession of gums (trust us, it ain’t pretty), recession of your hairline, and of course recession of the economy. 

And even though we don’t like talking about scary things, it’s important to do so, to know what we might need to expect in the future…or simply to learn from the past.

So, what’s a recession?

Recession is a period of time when the economy isn’t doing very well (aka weak or negative growth in the economy). You can think of it like the economy falling sick.

And just as there are symptoms of an illness, there are symptoms of a recession - these help us get an idea of where the economy is headed.

Basically, when people and businesses are feeling financially stressed, we see a whole range of symptoms like:

• Businesses start to fold
• People losing their jobs
• Households unable to pay their bills
• Discretionary spending massively dialled back 

The technical definition of a recession is two back to back quarters (3 month periods) of negative growth in real GDP. The last time Australia experienced this was at the start of 2020, during the pandemic.

Why are people talking about a recession now?

Following the recent announcement of Donald Trump’s sweeping tariffs, share markets around the world experienced their sharpest decline since the Covid-19 pandemic in 2020. 

In Australia, the main S&P/ASX200 index dropped over 7% within the week of Trump’s announcements, and major global indexes like Dow Jones Industrial Average also dropped over 7%.

With trade negotiations between the US and Chinese government (Australia’s largest trade partner), people are panicking and the scary R word is a hot topic on the streets.

Should we be freaking out about a recession right now?

The short answer is…maybe not yet? 

Dr Luke Hartigan, lecturer at the University of Sydney and a former Reserve Bank economist says Australians should be “concerned but not alarmed”. 

The US is only a small fry on the scale of Australian trade partners, so the direct impact of the new tariffs is going to be relatively small too. The bigger, potential problem is the beef between the US and China. 

With their trade war becoming slightly unhinged (to put it lightly), there’s a chance the China economy will begin to slow (which means they’ll be trading less with foreign countries), and we don’t want that because China is Australia’s biggest trade partner! 

Besides this, Australia is not in hot water yet…here’s why:

📉 Stock market volatility: It’s scary to see the value of your portfolio swinging back and forth over just a couple days, but, let’s just remember that the stock market only reflects where investors THINK the economy is heading. 

It’s not always an accurate indication of what’s truly happening in the economy because investors are people, and people can sometimes (read: often) overreact. 

💰 Unemployment rate: For Australia, a better signal of a potential recession is high unemployment rate. Thankfully, our rate is still pretty low and stable (at 4.1%) and new jobs are continually being created to keep Aussies employed. 

🏦 RBA interest rates: Lastly we have the Reserve Bank of Australia in our corner, who has the power to cut interest rates to provide a cushion to Aussie businesses and consumers when times get rough. Markets are expecting a rate cut in May and potentially more cuts during the year to help ease some of the financial strain we’re all feeling at the moment. 

But only time will tell the impacts of all these changes on our economy, so for now, sit tight!