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I won’t lie to you, things are not good. Thanks to the war between Trump and Netanyahu, the price of gasoline has increased, as have people canned food storage, Financial markets are falling, and inflation is rising (again!). Another interest rate hike is expected next month, consumer confidence is down, and so is AI come to our work. What a time to be alive!
For those who had completely developed frontal lobes in 2007 (unlike me, who was too busy playing Kingdom Hearts II on my Playstation), everything going on can feel a little GFC-ish. And those fears are completely unfounded.
Last week, the The International Monetary Fund warned The war in the Middle East had overturned the world economy and increased inflationary pressures that could take years to overcome, predicting that if the conflict continued, global growth could slow to just 2 percent, which would mark the first global recession since the pandemic.
However, the COVID-era recession lasted only two months before stimulus measures helped the recovery, while the impact from the current oil crisis may last much longer.
What is the problem?
Although the IMF’s definition of recession is more technical relative to economic growth, the outlook is still… not good. Even a recession can mean rising unemployment and high inflation, leading to higher default rates and generally lower consumption.
This can, obviously, have a big impact on the household budget, and it can cause a real shock for those who are not prepared.
What can you do about it
It’s clear that the recession is far from over, but at least it looks like we’re heading into a period of prolonged pressure when it comes to jobs and the cost of living. So what can you do now to prepare?
- Identify yourself: It is difficult to do any kind of planning for the future if you are not in your current financial situation. “Households with a clear handle on cash flow, a manageable level of debt and savings are in a better position to manage uncertainty, no matter what the economy is doing,” says Gemma Mitchell, head of advice and money coach at Rask. Start first with data, analyze how much money you’re making and the main areas you’re spending. What? Do you know how much you spend on your monthly bills? Are you spending all of your irregular payments, such as water bills or council rates? Mitchell recommends filtering expenses into “needs” and “needs”, and then filtering those wants between priorities and haves. “Identifying areas where spending can be reduced, even temporarily, can help create breathing room and make rising costs feel more manageable,” he says. Putting yourself on a solid financial footing now can go a long way in preventing future stress.
- Clear your debt: In difficult times, having a debt payment coming up can be stressful, not to mention a serious financial problem. If you can, take steps now to reduce or eliminate any low-hanging debts – I’m talking credit cards, buy-to-let purchases now, or car loans. “The key can be reducing consumer debt that attracts high interest rates. It’s worth asking yourself honestly if a product like a credit card is really serving you well, or if it’s costing you more than you’re paying back,” says Cara Williams, founder and financial advisor at The Hazel Way. Low-impact debts such as HECS are not prioritized here, but Williams says you should use this time to try to get your mortgage in the best possible shape. “It’s also a good idea to contact your mortgage broker to not only review your current structure and rate, but to help you understand your position and the options to expect a rate increase,” Williams says. “Run the numbers, understand what your payments would look like if your interest rate went up by half a percent, a full percent, or more.”
- Exit the scalpel: Keeping a close eye on your money is important at any time, but it’s especially important if you’re preparing for a downturn. Williams highlights some key areas where households can make savings, including recurring costs such as insurance, subscriptions, utilities, phone and internet connection. “Most providers will offer a discount rather than lose a customer,” he says. “Consider switching to an annual bill payment if a discount is offered, and lock in today’s price before the cost rises.” A quick check of your bank statement over the past three months can also highlight any erroneous subscriptions that you may be inadvertently paying for. The money you’ll (hopefully) save by doing this can be added to your emergency savings, as having a backup to reboot or dip into during tough times can be very useful. As William Buck’s head of wealth, Scott Montefiore, says: “When an investment strategy is chosen, it should be done with volatility as it is difficult to predict the ups and downs of the financial market.”
- Stay the course: Finally, while volatility can help tremendously when it comes to household expenses, the opposite is true for any market-linked investment you may have. “The real challenge for investors is not that markets crash, but uncertainty about how long those periods last,” says Besa Deda, chief economist at William Buck. “Long-term returns are made by staying invested in bad periods, which is why process and discipline are as important as forecasting.” Deda says investors can also prepare their portfolios by avoiding overconcentration in high-risk areas, including growth-oriented assets such as technology stocks, and maintaining adequate liquidity. He notes that during downturns, investors are often forced to sell for cash flow reasons, not because prices are falling. These same rules apply to your superannuation too. Recent analysis shows those who change their best allocations during market downturns can end up over $50,000 at worst. “Once an investment strategy is chosen, it should be done through volatility, as it is difficult to predict the highs and lows of financial markets,” says William Buck’s head of wealth, Scott Montefiore.
The advice given in this article is general and is not intended to influence readers’ decisions about investments or financial products. It is important to seek professional advice based on your individual circumstances before making any financial decisions.
Dominic Powell is the Money Editor of the Sydney Morning Herald and The Age.Connect through X or email address.
