German investment firm Deutsche Bank has predicted that Australia will enter a recession next year, after forecasting a spike in unemployment by one percentage point to 4.5 per cent by the end of 2023. The bank’s warning is based on a 1 percentage point increase in the unemployment rate, rather than the ‘technical’ definition of recession. Traditionally, a recession is defined as two consecutive quarters of negative economic growth (GDP).
A recession occurs when a central bank raises interest rates to control inflation. Falling investment leads to falling output due to high borrowing costs, while rising unemployment leads to lower incomes and lower demand. To sell their products, companies cut prices, but the problem is that the long-term unemployed still can’t afford them. To note, higher interest rates not only reduce investment, but also consumption, as people save to earn interest income. Also, if interest rates in Australia rise, then international investors will invest more money in Australia. Consequently, they would demand more Australian dollars, which would lead to an appreciation of the Australian dollar. This would cause Australia’s imports to fall in price, but Australia’s exports to rise in price, leading to a fall in Australia’s net exports (exports minus imports).
People who are already working and earning a lot of money can ride out the recession. But those who are out of work, in temporary jobs, or in low-paying jobs worry about what will happen if the recession turns into a deep and prolonged decline in economic activity, as it happened during the COVID-19 lockdown.
COVID cases are on the rise again. Just yesterday, due to COVID cases, many guests at the event voluntarily chose to send only one person per family to attend the function. In this case, the drop in restaurant demand has also affected the number of staff needed to serve guests. The lockdown caused by COVID-19 has led to high unemployment, as supplies in international markets have also been affected. In other words, when demand falls, output falls, and because businesses need fewer workers, unemployment rises, which means lower income and lower demand.
During a recession with rising unemployment, workers may worry about losing their jobs. The government loses tax revenue because the unemployed pay no income tax, and since the unemployed spend less, they pay less indirect tax. Businesses also lose profits due to job losses. If there is full employment, the demand for the product will increase, and the profits of the business will increase. Also, due to the high unemployment rate, a large number of people start to receive unemployment benefits, and some people may become less keen to find a job and accept a lower lifestyle due to reduced income. In particular, it is difficult for the long-term unemployed to find a job because they have been unemployed for a long time and employers are reluctant to accept them because they may have lost the skills to perform the job.
To overcome the effects of the 2023 recession, the government can increase Australia’s output through investment grants to businesses or tax incentives for businesses. Governments can borrow money from the public to promote the development of infrastructure projects that increase employment. An unemployed person can open a food stall as long as he is interested in cooking. In this case, he was able to make ends meet because the money changed hands. It could result in stimulating the economy resulting in a rise in employment. Also, lower prices during a recession can lead to higher demand when employment increases.
Households can survive the recession as large corporations try to use their resources, including time and money, by cutting costs and reducing prices to sell their commodities. They cut costs by laying off workers who may not be as important to them in order to keep the business competitive. Instead of cutting wages, companies fire workers because if they cut wages, workers will get angry and probably won’t work as hard. But those who lost their jobs and all their income will be hit hard by unemployment.
People on low incomes try to cut back on spending by postponing long trips to save money on gas, as there is always the fear of losing a small job during a recession. It would not be surprising if low-income people also put off driving to their places of worship and other places. Many volunteers may give up volunteer work to save money on car travel as they have to buy essentials for themselves and their families. People who are well-off or retired are seen to be doing more voluntary work.
People are also starting to study during the day to save on electricity bills and watch movies on Netflix, Amazon Prime, and YouTube instead of going to the cinema.
Parents can educate their children about wasteful consumption during difficult times, but teachers can play a role in making children understand as well. The demonstration effect in economics is all about showing off your wealth and tastes, but in some cases, it can lead to financial disaster. In 2015-16, 15 per cent of Australian households (roughly 1.3 million) were unable to raise $2,000 in a week for something important. With no income, there is no spending, and because there is no job, the bank will not give you a loan. Private medical care doesn’t entertain you. We cannot carry out our daily activities without money. Financial stress can also lead to insomnia, anxiety, homelessness, reduced consumption of milk and fruit, and lower self-esteem when borrowing money.
Then there are higher oil prices which lead to inflation, and consumers may reduce their demand for fuel because they cannot afford it. When consumers lose confidence in the economy, they change their habits and become more persistent in their low living standards.
In countries with political instability and social chaos, people should try to focus on personal advancement through education and employment rather than engaging in demonstrations and destructive activities. As in historical times, religious chaos has led to chaos in the economic sphere. It is crucial to stay healthy and stay away from problems, especially for poor people, but be aware there are monetary, emotional, and life costs.
We have seen the Russian attack on Ukraine that has not only led to displacements in the population but also led to a decrease in the well-being of the people affected. The impact of wars, riots, and genocides maximises destruction rather than economic construction, and the poor are the ones most affected. Wealthy people can survive the recession, not the ones who did not earn much by any standards and have no savings, and are in fear of losing their jobs.
Unemployment is a waste of national resources because not all available workers can be used to produce national output. It can also lead to medical costs from anxiety, depression, sleep disturbances, and shame. It can lead to crime because humans cannot survive without food, and it can happen during times of inflation and recession. Without work, there is no income, and without income, there is no spending. Both inflation and recession are bad, but the recession is considered to be much worse than inflation because people lose jobs during the recession. Inflation exacerbates economic inequality because businesses make more money than wage earners, especially those on low wages and those receiving unemployment benefits.
A long-term unemployed person can experience living in a situation of inflation and also in a situation of recession. When there is inflation but also a decline in economic activity (a rise in unemployment), it is a state of stagflation. Just like today, prices are going up but we also feel a slowdown in economic activity.
The recession has taught us that not only do new jobs need to be created, but existing jobs need to be reassigned to new people to ease unemployment. We don’t want a country of haves and have-nots.
About the Author
Dr Baljit Singh received his PhD in Economics from La Trobe University in Melbourne. The title of his thesis is Socio-economic Development and Fertility: A Case Study in India. His experience includes teaching and research in public health. His interests further extend to global health, health promotion, health systems and economics. His books are:
- Singh, B. (2022) Kavita Sundarya- Mere Nazar Se, Hindi Poetry Book, Hindi Sahitya Sadan, Delhi, India
- Singh, B. (2021) A Walk without Food, Xlibris, Sydney, Australia
- Singh, B. (2020) The Manifestations of Being, Xlibris, Sydney, Australia
- Singh, B. (2019) Topics in Population and Health, Xlibris, Sydney, Australia