How can the effects of a recession impact your business?

Australia has entered its first recession in more than three decades. Here’s what the effects of a recession are and how it could impact your business. 

Australia has entered its first recession in more than three decades as we weather the economic fallout from the COVID-19 pandemic. We look at the effects of a recession and how the downturn could impact your business. 

How do we know we’re in a recession?

A recession is a decrease in economic activity over a sustained period of time. It can happen in a specific country or region, or on a global scale (such as the Global Financial Crisis in 2007). Usually a recession is characterised by rising unemployment and decreased spending and economic output.

 

In Australia, economic growth is typically measured by looking at our gross domestic product (GDP), which is the value of goods and services produced within the country. During a recession, GDP usually decreases as businesses scale back operations or shut down entirely.

 

A ‘technical recession’ is defined by two consecutive quarters of falling GDP. Australia’s GDP fell in both quarters over the first half of this year, marking the country’s first recession since the 1990s.

How could the effects of a recession impact your business?

Now that we’re officially in one, what are the effects of a recession on you as a business owner? The reality is, it depends on your business, location, and industry. 

 

An analysis by McKinsey revealed that accommodation and food services, construction and retail trade industries could be hit hardest in the coming months. Industries such as electricity, gas, water and waste services, mining and technical services are poised to start recovering once the immediate effects of the restrictions diminish.

 

Some recessional impacts are common across most industries – and you might have already experienced them as a result of the 2020 pandemic:

1. Reduced cash flow

Often, small-to-medium businesses don’t have big cash reserves, so when money comes in, it quickly goes to paying bills and other expenses. In a recession, consumers tend to spend less and may delay purchases or payments, which could have a ripple effect on your business’s cash flow and financial commitments. 

 

The Global State of Small Business Report found cash flow to be the biggest issue concerning Australian small businesses, with 56% of survey respondents saying they expect it to be a challenge over the next few months.

2. Decreased demand

The most recent ABS figures show that Australians are saving an average of 19.8% of their household income, compared to 6% in the first quarter of 2020. At a time when people are tightening their purse strings, demand for products and services can decline – especially in discretionary categories such as recreation, hospitality, non-essential food and drinks.

 

This sentiment is echoed by an ABS survey of Australian businesses, where 81% of respondents said they expect to see a reduction in local demand in the coming months.

3. Operational changes

With reduced cash flow and decreased demand often comes the need to pivot your business and do things differently. Depending on your business, this might mean scaling back operations, holding off on major investments or reducing headcount. 

 

In a September ABS survey of Australian businesses, more than a third of respondents said they have changed the way they provide their products or services as a result of the economic downturn, while 26% have changed employee roles or duties. Almost a third of respondents said they expect at least one of the changes to their business would stay in place long-term.