Presented by Jones Partners

It has been nearly 100 years since Australia experienced the Great Depression of the 1930’s. Australians have long forgotten the scale and duration of this Depression, which lasted for nearly three years and led to a staggering unemployment rate of around 30%. Policy makers have since learned extensively from this period, allowing them to avoid economic disaster in 2008, through a sturdy financial system, developing export markets, heavy stimulus, and most importantly, a comprehensive understanding of the functions of interest rates.

Unlike its American counterpart, Australia was able to steer clear of a Great Recession, through maintaining relatively high interest rates before the 2008 crash. Australians were never exposed to the bubble housing market fueled by cheap cash rates that the Americans had access to leading up to 2008. This reduced the impact of the GFC on Australian housing prices, allowing them to recover in a few short years.

The key takeaway from this period of history is the importance of interest rates in managing the health of Australia’s economy. Heavy spending by the Australian government and reduced interest rates will drive inflation (as seen in 2020 during the pandemic). Increasing interest rates, in turn, is the only reliable way to then combat inflation.

It is easy to demonize the RBA for being insensitive to the experiences and needs of everyday Australians, who are undeniably struggling in the current economic climate. However, it is important to remember that the policy of the RBA has been developed through the successes and failures of past economic policies within Australia. Essentially, the RBA are attempting to induce a mild, regulated recession rather than risk something far more severe.

This forced slowdown of economic activity will undoubtably impact businesses extensively. It should further be considered that any period of heavy government spending will ultimately be funded by taxpayers. We expect there will be increased pressure from the ATO to repay outstanding tax debt. It is important to stay ahead of the curve and seek advice that comprehensively understands the economic climate, and its susceptibility to rapid change.

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