What is a recession, and is Australia headed for one? We break it down in simple terms

Australian businesses have stumbled their way through the year, but a stock market plunge in the US has sparked fears we could be hurtling toward an economic trough.

US data has sparked fears we could be headed for another global recession – but what does that actually mean?

Economies are generally growing, but they often fluctuate. This is what’s called a business cycle, which has ‘peaks’ and ‘troughs’ of activity.

A business cycle has four key phases.

Expansion is when people have more cash to spend, so they buy more goods and services. This means businesses hire more people, which means wages go up – and then prices go up. Those rising prices are measured by inflation.

But, as growth and inflation lead to more expensive goods and services, eventually expansion hits its highest point – the peak.

Because paying more for important things means a tighter budget, people start to spend less on non-essentials. This is called contraction.

When budgets get tight, Aussies start spending less — and demand for goods and services goes down.

That means less profit for companies, who start laying off workers, which means unemployment goes up, which means spending goes down — leading to a trough in economic activity. These economic contractions, if big enough, can lead to a recession.

While the definition of recession depends on who you ask, the Reserve Bank of Australia (also known as the RBA, the people who determine your interest rates) say it’s generally an overall decline in economic activity that lasts two economic quarters — about six months.

If these recessions last long enough, are severe enough and impact enough economies around the world, they can turn into an economic depression.

Australia’s last official recession was in 2020, during the Covid pandemic.

So are we headed for another one?

A major plunge in the US stock market has sparked renewed fears Australia could be headed for a recession. Pictures: iStock

Well, there are worrying signs. A recent KPMG report from July 16 reported the economy stumbled its way across the line in the first three months of 2024, with just 0.1 percent growth over the quarter.

According to the Australian Securities and Investments Commission, by July 2024, every state and territory had so far had more insolvencies — that is, businesses shutting down — than the previous year.

The RBA had been steadily increasing interest rates in a bid to slow inflation, putting more pressure on homeowners to decrease their spending.

But it’s now sweating on how to keep inflation under wraps without pushing the country into recession, deciding in August to hold interest rates at 4.35 per cent.

A major stock market plunge earlier this month in the US sparked further fears for Australia’s economy. Because the US economy and market are such big parts of the global market, this can have knock-on effects in other country’s markets.

Those concerns have since eased as the market clawed back some normality, and leading fund manager Betashares’ chief economist David Bassanese said there were no signs to suggest the US — and by extension, Australia — was set to enter a recession.

Others have put the US at a 25 to 50 per cent chance of recession, so it’s now a waiting game.