min read
· Posted on
February 21, 2024

RBA cash rate: What’s all this talk about recession?

There's a lot of talk going around about recession. Are we a tipping point of recession right now? And what does that even mean?

What's the key learning?

  • A 'recession' is a period of sustained weak or negative growth in the economy.
  • The technical definition of recession is two back to back quarters of negative growth in GDP.
  • We're now seeing inflation start to come down in Australia, but if its too fast and too soon, we might be entering a recession.

In the lead up to this month's cash rate announcement, there was a LOT of talk about recession.

And no, we’re not talking about gum recession or hair recession.. We’re talking financial recession.

Some economists are feeling major relief right now because they were worried that another cash rate would have sent us into the big, the bag, the scary R-word. Recession.

So let’s break that down.

First up, 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:

  • A drop in household spending
  • A drop in investments made by businesses
  • The unemployment rate also tends to move up (although we haven’t really seen that yet)
When someone asks me if I want to grab dinner in this economy.

Okay…but how do we know for sure if we’re in a recession:

Here’s the thing.

You won’t know until you’re in it.

It’s just like getting a cold. One day you’re feeling great and you have no idea there’s a sneaky virus inside you getting up to no good.

And the next day, you’re in bed, sneezing and coughing.

In the same way. it’s not always easy to predict if a recession is about to happen or not, you only see it once it’s there. 

How recession be creeping up.

The technical definition of a recession is when there are two back to back quarters (3 month periods) of negative growth in real GDP.

GDP is a measure of total economic output that economists use to help measure how healthy the economy is. We go into what GDP is in a bit more detail here - check it out.

The last time there was a major recession that impacted Australia was the 2008 Global Financial Crisis that began in the United States.

It was the most intense financial crisis since the Great Depression in the 1930’s.

Why are we talking about recession now?

Let’s set the scene real quick.

We had a pandemic, and we’ve got the Russia/Ukraine war that brought with them some economic instability. 

Inflation started shooting up, and it peaked in December last year at 7.8%

The RBA jumped on inflation’s back in May 2022 and started increasing the cash rate to put pressure on spending, and eventually bring inflation down.

The RBA trying to get onto inflation

But if the RBA hits the brakes too hard, spending comes down too fast, too soon - and we could be in recession territory.

What are we seeing?

The good news is we’re finally seeing inflation calm TF down.

Inflation for the June quarter was up just 0.8% in the June 2023 quarter - that’s the lowest it’s been in almost two years!

The RBA’s getting what they were hoping… less spending.

So they’ve pulled back from chasing inflation so hard. Phew! And this pull-back might just be what keeps Australia out of recession.

Fingers crossed!

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