This article is part two in a two-part series on understanding recessions. If you haven’t yet read part one on “What is a recession?” go check that out first.

The 2008 Global Financial Crisis (or GFC, for short) was the most recent financial crisis that the world faced. It was rough - people lost jobs, the share market took a big hit and It took years for the global economy to recover.

And the GFC is the most recent reminder of what not to do if we want to keep our economy stable.

So what actually went down?

Let’s set the scene. It was early 2008 - 27 Dresses was the hottest movie on the screens and Flo Rida and T-Pain had just released the song “Low”.

And maybe the song was a sign of things to come. Because the share market got reaaaaal low and there was a lot of financial T-Pain to come (excuse the pun).

It all started in the US housing market, where house prices were booming, interest rates were low and government policies encouraged home ownership.

Factor 1: Sub prime mortgages

Banks became pretty pretty pretty fast and loose with their lending policies. Low income? No problem. Previous defaults. We’ll take it. 

Put simply, if a loan was secured against a property, it was fair game. These were called ‘subprime mortgages’. In other words, mortgages given to people with low credit scores and lower likelihood of repayment. 

And surprise surprise - people started defaulting on these loans… because they shouldn’t have been approved for the home loan in the first place.

‍Factor 2: The housing bubble

So the banks were fast and loose. 

As a result, more Americans were getting access to home loans. And as the competition for houses became greater, the average price of purchasing a property jumped too.

The US saw its average house price grow by 42% between 2003 and 2005 alone. As borrowers failed to repay their debts and the housing bubble popped, the banks were forced to take ownership of trillions of dollars of houses that it held as collateral.

But it gets worse. 

These ‘subprime’ mortgages were also packaged together into its own financial security. And those were onsold to investment banks. So as these borrowers defaulted, the investment banks were left holding worthless investments in subprime mortgages

This crisis quickly spread around the world and other countries also started going through economic instability too.

Long story short, the impact of the GFC was felt for several years across many countries.

Australia for the most part was shielded from this recession as Aussie banks weren’t as exposed to the US housing market, and the overall Australian economy was strong at that time.

Okay cool - so are we in a recession now?

Well, we’re starting to see some of the indicators of a recession - but that doesn’t mean we’re actually going through a recession. 

There are a number of factors that are the typical indicators of a recession.

• Rise in unemployment: If people are getting laid off left, right and centre, it could mean trouble.
• Decline consumer spending: If people stop buying things, businesses start to suffer, and that’s bad news.
• Decline in the stock market: If stocks start dropping, it could mean investors are worried about the economy.
• Decline in house prices: If houses aren’t selling, the economy might be in trouble.

Okay, so let’s talk about Australia.

• Our current unemployment rate is sitting pretty at 3.5%, which is at an all time low.
• We’ve seen consumer spending decline slightly
• The ASX200, the index of Australia’s largest 200 public companies, is flat over the past 12 months while the Nasdaq100 is down only 2%
• The value of Australia's housing market fell by 5% across capital cities in 2022

So, for the time being, the economic sitch is lookin alright.

But as we’ve seen, aggressive cash rate rises make it harder to repay mortgages for individuals and makes the cost of borrowing higher for businesses. Each cash rate rise increases the chances of Australia entering a recession.

But, the good news is, even if Australia does enter a recession, it’s not likely to be an overly painful one, or a very long one.

Economists say we’ve got tonnes of natural commodities and resources to support the economy.