Introduction

When the media starts reporting higher interest rates and spiralling price rises, their next story will almost certainly scream the impending doom of a possible economic recession.

But what exactly is a recession and is it all bad news for local share market investors?

Most commentators believe a ‘technical recession’ occurs when there have been two consecutive quarters of negative growth in real gross domestic production or economic output, but there really is no strict definition. It’s more just a time when unemployment increases and growth falls.

Introduction

From psychedelic drugs and the birth of rock and roll in the sixties to the sexual revolution and female equality of the seventies through to the rapid up take of personal computers in the eighties, Australian ‘baby boomers’ have always caused waves. 

Now as they move into retirement, the groovy generation are about to flood our hospitals and age care facilities, beach our economy with falling demand and workforce shortages and dump Government revenue via a sharply reduced tax take.

So, who are these people? 

Introduction

In recent times, the Australian economy faced potential challenges, including elevated interest rates and inflation levels, which led to concerns about a recession as 2022 commenced. This prompted speculation about the potential impact on the share market, raising the question of whether it might also experience a decline.

However, historical trends offer a different perspective. Throughout various periods, including instances of economic contraction, the Australian share market has demonstrated resilience. Notably, during each of the country's previous nine recessions, the local market managed to trade at higher levels.

Introduction

To stem its then soaring population growth rate, which was widely believed to be crippling economic development, China introduced the draconian ‘one child policy’ in 1979 – a move now seen as directly lifting 150 million people out of poverty.

The policy focused global attention on fertility rates around the world. It raised the question of whether strong birth rates enhance economic growth or, in fact, stop countries from reaching their full potential.

Introduction

The word ‘inflation’ doesn’t only dominate business news headlines, but finds its way into general news reports too.

So, what is inflation and how does it affect you? 

In simple terms, inflation signifies a rise in the price of goods and services, meaning you pay for more for every purchase you make. 

Introduction

In 2007 China displaced Japan as Australia’s largest trading partner. In 2009 it became Australia's largest export market, and in 2017-2018 we sold A$123.3 billion worth of goods and services to China – 30.6% of our total exports. In comparison Japan, still our second most important market, only took 12.7% of our exports.

On the flip side China supplied us with 18% of our imports worth A$71.3 billion. Our total economy, as measured by GDP, was worth around A$1.9 trillion at the time, so our two-way China trade made up about 10% of our economic activity. That may not make us totally reliant on China for our economic health, but any major disruption to that trade means Australia will have many billions of dollars less to run our schools and hospitals, pay pensions and wages, and to maintain our high standard of living.

Introduction

Australia’s annual inflation rate has taken an unexpected step up, increasing pressure on the Reserve Bank to push interest rates higher and once again raising the prospect that Australia will fall into recession sometime over the next few months.

The annual inflation rate for the year to August reached 5.2 per cent, up from 4.9 per cent recorded for the year to July, spurred by higher prices for petrol, financial services, and labour costs, following the 5.75 per cent wage rise for 2.4 million Australian workers in July.

Introduction

You might think that only importers and exporters pay attention to the value of the Aussie dollar, but movements in the exchange rate affect us all.

What are the main influences on exchange rates? Ultimately it comes down to supply and demand, and that can be determined by a number of things:

Introduction

GDP. If ever there were three letters designed to make us yawn, these would be solid contenders. So why are they so frequently on the lips of politicians, economists and finance journalists? More importantly, what does GDP mean for everyday Australians like you and me? Let’s get the boring bit out of the way first.

What is GDP?

GDP stands for Gross Domestic Product, which is the value of all of the goods and services produced by a particular country. This includes, amongst other things, private and public purchases, government spending, investment, plus the value of exports minus the value of imported goods and services.

Yep, boring.

Except that GDP provides a relatively simple way of conveying the overall strength of a country’s economy which directly affects our lives.