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I’m not gonna lie to you, things aren’t looking great. Thanks to Trump and Netanyahu’s war, petrol prices have exploded, people are hoarding canned food, financial markets are falling, and inflation is rising (again!). Another interest rate rise is expected next month, consumer confidence has nose-dived, and AI is coming for our jobs. What a time to be alive!
For those who had fully formed frontal lobes in 2007 (unlike me, who was busy playing Kingdom Hearts II on my Playstation), everything that’s going on might be feeling a little GFC-ish. And those fears aren’t completely unfounded.
Last week, the International Monetary Fund warned the war in the Middle East had upturned the world’s economy and increased inflation pressures that could take years to overcome, predicting that if the conflict continues, global growth could slow to just 2 per cent, which would mark the first global recession since the pandemic.
However, the COVID-era recession lasted just two months before stimulus measures helped fuel a recovery, whereas the impacts from the current fuel crisis could be far longer lasting.
What’s the problem?
Although the IMF’s definition of a recession is a more technical one relating to economic growth, the outlook is still … not good. Even technical recessions can mean a rise in unemployment and high inflation, leading to higher rates of loan defaults and generally lower spending.
This can, obviously, have a hefty impact on household budgets, and can cause a real shock for those who are unprepared.
What you can do about it
It goes without saying that a recession is far from locked in, but at the very least it does seem like we’re heading for a period of prolonged pressure when it comes to jobs and the cost of living. So what can you do now to prepare?
- Know yourself: It’s difficult to do any sort of planning for the future if you’re not across your current financial situation. “Households with a clear handle on their cash flow, a manageable level of debt and some savings buffer are far better placed to navigate uncertainty, regardless of what the economy is doing,” says Gemma Mitchell, head of advice and money coach at Rask. Start first with the data, analysing what money you have coming in and the main areas where you’re spending. Do you know exactly how much you spend on bills each month? Are you across all of your more infrequent payments, such as water bills or council rates? Mitchell suggests filtering expenses into “needs” and “wants”, and then filtering those wants between priorities and nice-to-haves. “Identifying areas where spending can be reduced, even temporarily, can help create some breathing room and make rising costs feel more manageable,” she says. Placing yourself on a strong financial footing now can go a long way to preventing distress in the future.
- Clear your debt: In hard times, having looming debt repayments can be stressful, not to mention a serious drain on your finances. If you can, make moves now to reduce or remove any low-hanging debts – I’m talking credit cards, buy now-pay later purchases, or car loans. “A key focus may be to reduce consumer debt that attracts high-interest rates. It’s worth asking yourself honestly whether a product like a credit card is genuinely serving you well, or whether it’s costing you more than it’s giving back,” says Cara Williams, founder and financial adviser at The Hazel Way. Lower-impact debts such as HECS are less of a priority here, but Williams says you should absolutely be using this time to try to get your mortgage into the best shape possible. “It’s also well worth reaching out to your mortgage broker to not only review your current structure and rate, but to help you really understand your position and options anticipating potential rate increases,” Williams says. “Run the numbers, understand what your repayments would actually look like should your interest rate rise by half a per cent, a full per cent, or more.”
- Get out the scalpel: Running a critical eye over your finances is a worthwhile endeavour at any time, but is particularly important if you’re preparing for a downturn. Williams highlights some key areas where households could find savings, including recurring expenses such as insurances, subscriptions, utilities, phone and internet connection. “Most providers will offer discounts rather than lose a customer,” she says. “Consider switching to an annual bill payment if a discount is offered, and lock in today’s pricing before costs rise.” A quick audit of your bank statement over a three-month period can also highlight any errant subscriptions you might be unwittingly paying for. Money you (hopefully) save by doing this, can be funnelled into your emergency savings, as having a buffer to fall back on or dip into when times get tough can be invaluable. As William Buck’s head of wealth, Scott Montefiore, says: “Once an investment strategy is selected, it should be held through volatility as it is hard to predict the highs and lows of the financial markets.“
- Stay the course: Finally, while shaking things up can significantly help when it comes to household expenses, the opposite is true for any market-linked investments you may have. “The real challenge for investors isn’t that markets fall, but the uncertainty around how long those periods last,” says Besa Deda, chief economist at William Buck. “Long-term returns are earned by staying invested through uncomfortable periods, which is why process and discipline matter as much as prediction.” Deda says investors can also prepare their portfolios by avoiding excessive concentration in higher-risk areas, including growth-focused assets such as tech stocks, and maintaining adequate liquidity. She notes that during downturns, investors are often forced to sell due to cash flow reasons, not because prices fall. These same principles apply to your superannuation too. Recent analysis shows those who switch their super allocations during market downturns can end up more than $50,000 worse off. “Once an investment strategy is selected, it should be held through volatility, as it’s hard to predict the highs and lows of the financial markets,” says William Buck’s head of wealth, Scott Montefiore.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. It is important to seek professional advice that takes into account your personal circumstances before making any financial decisions.
Dominic Powell is the Money Editor for the Sydney Morning Herald and The Age.Connect via X or email.
