State of Play – A Formal Recession: What It All Means
Good afternoon and welcome to our State of Play. Well, it was all over the headlines yesterday and the media loved it, didn’t they? They love bad news. We’re in a formal recession. I don’t know about you, but we kind of already knew that, didn’t we? What had happened was that the Australian Bureau of Statistics had released its figures, but we knew that we had already had two quarters consecutively of negative growth. So, that is a formal definition of a recession. I think what did catch everyone off guard was the amount that the economy contracted or shrank in the June quarter. So, we’re looking backwards. We’re looking at data that was collated for the period ending 30th of June. So, we’ve come a long way since then. A lot more has happened.
Victoria has gone into lockdown. But when we look at the figures for the March quarter, that ended obviously at the end of March, just when we kind of went into shut down and the June quarter, we have had our economy shrink. So, when we look at the numbers for the June quarter, what they said is, it’s official, for the first time in 29 years, we had a 7% fall in our gross domestic product. That’s the amount that we earn as a nation.
So, this is the biggest fall since 1959. And it’s bigger than any of the economists that the major banks predicted. Everyone was talking 5%, maybe 6%, and what the Australian Bureau of Statistics said was that this is the lowest annual growth since World War II. So, the economy as a whole … GDP is what we earn, but the economy is everything in the mix. As a country, we shrank 6.3%. And at the end of March, they said that it was going to be a 1.6% growth rate. So, we really have been on a slippery slope from then.
The problem with this recession compared to the last one, and for many a person now, like there can be adults, people in their 30s and 40s that have never lived through a recession before, because we were the lucky country that never, ever went backwards in nearly 30 years. So, whole generations have never seen times like this, and it’s a different sort of recession because the last recession, the one we had to have, remember the early ’90s, that was we had high inflation. We had the [inaudible] ’80s. Remember, Wall Street and movies like that where everybody was getting rich on the stock market. And then we had the stock market crash in ’87, but we still had interest rates going through the roof. So we had interest rates, high inflation rates at 18, 19%.
So, when the recession hit, there was a lot of room for the government to move. They could cut interest rates and try and get us back on an even keel, and low rates mean people go out and borrow, people go out and spend, but our economy has been on life support for a long time. So, we have rates that can’t go any lower 0.25% and the reserve bank left those on hold on Tuesday. So, there’s nothing more to do, no more buttons to press or levers to pull in terms of trying to kickstart our economy, getting the bellows under it. So, it’s a different type of recession. And obviously it’s a COVID induced recession.
Josh Frydenberg said our record run of 28 consecutive years of economic growth has officially come to an end yesterday. He said this crisis is like no other. The World Bank is expecting more economies to contract this year than at any other time since 1870. So, we’ve never had a global impact like this. So, it’s a massive upheaval. When you look at all the blips on the radar over time, you’ll see the red mark below the line there, quarters where we’ve had negative growth or recessions. So, you’ll see key events that you may remember or have heard of.
There was an oil crisis in 1974. In 1981 to ’93, there was a recession that you could see a whole cluster of negative quarters there. You can see the ’90, ’91 recession. The last one we had, you can see a few red lines below the line there, and you can see December 2000, the dot com crash. There’s one unique red below the line mark. And again, the GFC in December 2008 is just one quarter of negative growth. And then in Australia, we managed to bounce back. Queensland floods, small period of negative growth. But look at this one in 2020, look at that red line. We had a small period of negative growth in the March quarter and then the June quarter is just off the charts, down 7%. So, we’ve never ever seen anything like that since the 1950s or post-World War II. So, massive time of change and upheaval for us now.
So, household consumption collapsed. We stopped spending. So 12.1% drop in what we spent and it had already fallen in the March quarter. And obviously that’s because of COVID. There was 12.7% decline annually. That fall in consumption accounts for 60% of GDP. So of what we spend and the economic activity we have as a nation, 60% of that is made up of what we consume. And there was a 17.6% fall in services. In other words, we just didn’t consume services because of lockdowns, physical restrictions, social distancing, that sort of thing.
Private business investment has also declined. So, businesses aren’t investing for the future, obviously because it’s so uncertain and no one knows, but that’s what a recession does. Everything contracts, because everyone’s scared, everyone stays port. If we don’t move and we don’t change till we know what’s happening, then unfortunately, as Roosevelt once said in the Great Depression that it’s a self fulfilling prophecy. We have nothing to fear he said but fear itself. When we’re afraid, we don’t spend, we hoard. When we’re afraid, we don’t invest. Businesses don’t invest for growth because they don’t know what the future will look like. So business investment contracted six and a half percent, and it was down 0.8% in the March quarter as well. So it’s now down 7.6% in total for the year.
The other thing that’s happening is we’re earning less. We’ve got less disposable income. So, that’s down 7.8% for the quarter. And that’s 6.9% over the whole year. And our savings rate went up, because what do people do when they’re scared? They save. We hoard. We want to be cash rich because we want to have some flexibility and we want to have a war chest. So people started hoarding. Savings rose at 19.8%. When people save, they don’t spend. When they don’t spend, the economy contracts, fewer jobs, less business, less money in circulation. The household savings rose then $42 billion to $59.5 billion. Think of it as $59.5 billion not in circulation in the economy. People are not spending. And if people aren’t spending, businesses go bad, people lose their jobs. That sort of thing.
There was a $35.2 billion fall in household spending with decreased spending on services. So when we save, we don’t spend, and we spent $35 billion less. And our household income did rise $7.1 billion because of government grants, assistance, job keeper, job seeker, that sort of thing. So, we did have more money. Problem is we’re not spending that money, so the economy is shrinking or contracting.
When we look at the property market, it’s a different story, because … and I mentioned the property market because most of us in Australia measure our wealth as equity and property. Most of us have most of our wealth or savings tied up as money in the family home or investment properties. We’re more likely to have equity in property than cash in a bank account. So, when they implemented stage two restrictions in Victoria, Australia wide on the 25th of March, we saw since then less property supply, because not only are people scared and not doing anything, and we tend to think “Oh, you won’t buy property. You’ll just wait and see what happens in the market.”
But what happens is that sellers respond by saying, “Well, I’m not going to sell my property, I’ll wait and see what happens in the market.” And sellers have no real impetus to sell at the moment because they’re getting a six month holiday on their loan and that’s being extended potentially another four months. And they don’t have to, they’re not feeling pressure yet, but new listings fell 50.3% from mid-March to May. So people just didn’t put their properties on the market. There was less stock. And what that meant was really, really restricted supply and pressure on demand. So, there were more buyers than there were sellers. There was limited stock.
Now, this was always a seasonal thing at that time of year, but people expect the market to bounce back in spring. A lot of sellers say, “I’ll wait for a spring market to sell my property.” And that’s hit with Victoria still in lockdown. So, we can see some correlations when we look at the next graph that shows us what’s happened with lockdowns, what’s happened other years in a spring market and what’s happening right now.
So in the four years prior to 2020, the number of new properties listed for sale nationally has increased 6.3% between July and August. However, in this year, we saw it not increase, 6.3%. We saw it decline by nearly 10%. So if you look at this graph here, this is how the market moves over the years. And we can see the last four years. We see, yep, it’s kind of flat lines a little bit, goes nowhere in the winter months, but you see it rise. And this has happened in stage four lockdowns in Victoria. So nationally, what’s happened instead of more listings coming on the market which you can see in previous four years, we can see the yellow lines. There’s actually fewer listings, and listings are historically lower than corresponding time of the year in other years.
So people not doing anything and people not selling for now, which has meant our property market has been underpinned and stayed fairly stable. So people probably aren’t feeling as bad about the recession as the media is making out because they’re still got wealth in property, property prices haven’t slumped and RP Data or CoreLogic backs that up with their data. They’ve looked at people searching for comparative market analysis. So usually agents, if you asked to list your property, they’re going to run a report to say what it’s worth or investors who have CoreLogic will look at comparable prices in their suburb when they list their property for sale. It’s the first step that an agent will do before listing a property on the market. So what they’re found, and you can see the yellow line there, is that people aren’t searching to see market value to put a property on the market, whereas they have done so in other years.
Now, you can see in December, it goes right down, because who lists their property, who signs to sell on Christmas day with an agent. So, no one’s selling. The market falls off a cliff over December, January, but then it comes back as the year goes on and it’s fairly solid, but you really see the rise in spring and you see the fall down in autumn through the winter months. Not happening this year. Definitely fell off a cliff when COVID hit. We sort of had a recovery and then you can see, and these are national figures when Victoria went into lockdown. Not so much that other states were in lockdown, but other states became fearful because they said, “Oh, there can be a second wave. We’ll just hoard our stocks.” So, there’s a whole lot of buyers out there. The government has created an economy where they’re pumping money into home builders, grants, and the property market to underpin it but there’s nowhere for that money to go because there is very, very limited stock and low supply.
You can see that on the bar graph there. You can see that, especially in Melbourne, we can see that there’s far fewer listings, new listings than any other time. And similarly, Sydney has fewer listings as well.
And property listings do in sales accord with consumer sentiment. So if everyone’s feeling good, if the economy’s good, people are out there buying property. When the economy is bad, not only is no one selling, but fewer people are buying, but we’ve got this artificial head of steam, at least till the end of the year now with the home builders grant where people are wanting to renovate. Bunnings sales have gone through the roof. Homeware super centers and everything and furniture stores that people are really nesting and investing money in their home because of the way the world is and what’s happening with COVID.
There is a unique opportunity right now because of all those factors that I’ve shared. There is an arbitrage in the market for property that will be with us longer term, but really is going to hit critical mass and have a head of steam up until the 31st of December with the home builders grant right now. So, I’m going to share more about that at our live stream, our property development live stream on Saturday, the 5th of September. So, I’m going to put a link up now. It’s in the comment section and it’s also going to be in the description section of this live stream.
What I’m going to be sharing with you on Saturday is what’s happening in the property market, where there’s a really unique opportunity for quick profits right now with very little work because of zoning laws right now, because of government grants and because of supply and demand and our first recession in 28, 29 years. So, it’s planets aligning and a perfect storm for the strategy that I’ll be sharing with you that many of our students are doing and having success since March this year during COVID. And you have heard Karen Baldwin on our property connect webinar this week, I’ll be following her on our property connect Facebook page, how she did seven deals in five weeks with this strategy. So, we’ll drill down and uncover it all on Saturday mornings live stream on the 5th of September. So go to those links there in the comments and the description section and I’ll catch up with you on Saturday.
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