Rate cuts spark recession fears
Last week's first official interest cut in almost three years, and the prospect of more to come, is prompting speculation that Australia is heading toward economic recession.
Some economists are tipping up to three more rate cuts in the next 12 months, which would certainly reflect recession-like conditions.
Economic recessions are horrible. They bring financial hardship to average Australians which puts enormous stress on relationships and families.
Thankfully we have a generation of Australians who have never had to endure double digit inflation or interest rates. In fact, no Australian under the age of 46 has suffered through an economic recession as a responsible adult.
The last recession back in the early 1990s was the one then Treasurer Paul Keating claimed was "the recession we had to have".
Keating used that recession to re-engineer the entire economy which set the foundation for the last 28 years of prosperity. He deregulated financial markets, floated the Australian dollar, cut tariffs and introduced compulsory superannuation.
History will show that some good (from hard decisions) did come out of the last recession despite the financial stress on so many Aussies.
Some, mostly rich, decision makers think another recession would be good for the country if it prompted a new round of Keating-like reforms, and remind us of how good we've had it.
There is a school of thought (again, mostly from rich commentators) that another recession would be good for our resilience and shake governments, industry and consumers from their good-times lethargy.
More than 28 years of positive economic growth is a world record for a first-world country and a remarkable achievement.
But the economy is certainly changing.
The fall in major city house prices along with low wage growth is dampening sentiment. The previously strong jobs market is softening as housing construction slows
On the positive side, the biggest trade surplus since 1973 shows our exports are absolutely booming while company profits and business sentiment has been holding up.
It's fair to say the economy is at a crossroads.
Tipping into a recession, in our view, would hinge on two important occurrences:
• A continued deterioration in housing values typified by a big rise in defaults from off-the-plan settlements.
• The US-China trade war intensifies and badly impacts our exports.
There are plenty of uncertainties so don't bury your head in the sand and ignore your financial problems. If you want to insulate and survive relatively unscathed you should start preparing.
There are some simple things you can do to reduce the impact of the downturn on you finances. The sooner you act, the better off you will be.
1. REDUCE YOUR DEBTS
Before you even think about spending or investing the extra money from lower home loan repayments, pay off your debts. We're talking credit cards, personal loans and your mortgage. Saving interest on debt is far more attractive than earning interest on savings, especially at the moment.
If you ignore interest rate cuts, and don't reduce your monthly mortgage repayments, you will pay off your loan a lot faster and save heaps in interest.
2. LIVE WITHIN YOUR MEANS
It's back to Nanna's day … cut your coat according to your cloth. That means be conservative and live within your means.
Resist impulse buys and save up for things instead of splashing out on credit.
Don't commit to any expenses now unless you're positive you can afford them. Think twice about committing to things like expensive gym memberships, mobile phone plans and holidays. Would the money be better spent paying off your debts? What happens if you or your partner lose your jobs?
3. CUT UNNECESSARY EXPENSES
Now is the time to save as much as you can. The easiest way to boost your savings is to reduce unnecessary costs.
Start with your budget. What can you live without for say six-months, while you get your debts under control and build some savings? Can you put off buying new clothes, eat in on date night, or go camping for your next holiday? When you're at the supermarket look for cheaper home brand products, buy in bulk when you spot a good special and plan meals for the weekend so you don't have to dial home delivery.
4. INCREASE YOUR INCOME
We know the job market is softening at the moment, but there are lots of things you can do to add to the family income.
Can you volunteer for overtime or extra shifts at work? Does your field allow you to do a bit of freelance work outside your regular job? What about getting a second job in the evenings or on the weekend?
Is there a little business you've always wanted to try? Maybe something like catering, dress making, landscaping or handyman work? Can you start it on the side and build it up?
Don't forget to check you're getting all the possible government benefits.
5. START AN EMERGENCY FUND
If you've paid off your expensive debt, like your credit card, start an emergency kitty. It will be a godsend if you or your partner are out of work at some stage over the next year. If you keep your jobs the money will come in handy when its time to pay big expenses like car rego, council fees or your quarterly electricity bill.
If you have an offset account attached to your home loan store the money in there. It will be available for an emergency and effectively reduce the amount you owe, so you pay less interest.