Quarterly Economic Update: Oct – Dec 2023

Quarterly Economic Update: Oct – Dec 2023

Economy, Finance, Investing

Global growth is forecast to slow and remain below its historical average in 2024, reflective of tighter monetary policy in advanced economies, as well as a soft outlook for China. Australians can expect higher prices, higher interest rates and higher population growth, with economic growth and unemployment decreasing. Inflation continues to bite With a new Governor at the helm of the RBA, and inflation tracking down since its peak in the December quarter 2022, public sentiment hoped that rate rises would be paused. However, the RBA delivered another rate hike at the November 2023 meeting, bringing the official interest rate to 4.35% – the highest level since 2011. It is likely that an increase in the monthly CPI indicator was a key trigger for the RBA to raise rates, as the monthly indicator rose to 5.2 per cent in August, and then rose again to 5.6 per cent in the September data. However, the next monthly data point, for October (which came out after the November rate rise) had inflation decreasing to 4.9 per cent. Services inflation remains high and was the primary driver of stronger-than-expected underlying inflation in the September quarter. Interest rates – will they or won’t they? The RBA continues to be cautious about the inflation outlook for Australia for several reasons: high and sticky inflation in the services market, house prices recovering sooner than anticipated, a tight labour market and increasing population growth due to migration. A survey of 40 economists by the Australian Financial Review shows that the median forecast is that the RBA will start cutting rates in September 2024, whilst the bond market is projecting an easing of rates by mid-2024. The RBA will meet only eight times in 2024, reduced from 11, beginning in February – following an independent review ordered by the Treasury. Coupled with the RBA governor’s commitment to return inflation to the target range of 2-3%, more rate hikes may be on the cards. Holiday spending to remain flat A survey by Roy Morgan forecast shoppers to spend $66.8 billion during the pre-Christmas sales period, only up 0.1% from the same period in 2022, likely as a result of cost of living impacts. Sales spending for the Boxing Day period to December 31 was expected to be about $9 billion, including $3 billion on Boxing Day itself, as retailers prepared larger discounts than usual after a slow year. Hot Property House and unit prices grew steadily in 2023, with a national annual growth rate of 5.42% (6.54% in capital cities). The main drivers include the highest net overseas migration levels ever recorded, few vacant properties and stronger demand for established homes due to the construction industry facing capacity and cost issues. This growth forecast is expected to continue as most experts believe demand for housing will continue to outstrip supply. However, Australia’s cost of living increases and interest rate uncertainty will keep biting—leading to weaker price growth than previous years. The rental market remains in a critical shortage of available dwellings according to SQM Research. Due to the ongoing supply and demand imbalance, the market is expecting capital city rental increases of 7-10% for 2024, on top of an average 10% market increase in 2023. The information provided in this article is general in nature only and does not constitute personal financial advice.  

Quarterly Economic Update: Jul – Sep 2023 

Quarterly Economic Update: Jul – Sep 2023 

Updated on Economy, Finance, Investing

Australia’s annual inflation rate has taken an unexpected step up, increasing pressure on the Reserve Bank to push interest rates higher and once again raising the prospect that Australia will fall into recession sometime over the next few months.  The annual inflation rate for the year to August reached 5.2 per cent, up from 4.9 per cent recorded for the year to July, spurred by higher prices for petrol, financial services, and labour costs, following the 5.75 per cent wage rise for 2.4 million Australian workers in July.  Some analysts believe recent wage increases and the Federal Government’s drive to reduce unemployment levels below their current historic low levels and provide more union friendly workplace regulations, will combine to push wages even higher.  The prospect of further wage hikes, low productive improvements combined with continued high levels of inflation, threatens to return the Australian economy to the dismal economic days of the seventies and with it, stagflation.  Of all the domestic price hikes though, higher petrol prices are seen as the most troubling as they have such significant flow through effects, making everything in the country more expensive to produce and so lifting the cost of living for all Australians.  The prospect of higher oil prices internationally, following a decision by Russia and Saudi Arabia to restrict production to boost prices, has cast gloom across the global economy, putting economies everywhere under pressure of higher energy costs.   Globally, US Treasury 10-year bond yields rose to above 4.5 per cent during the past month, taking them to their highest level since the global crisis started in 2007, as fears mount that climbing inflation will persist for years to come.   This, and the generally accept downturn in growth in the massive Chinese economy, is prompting fears overseas that the US economy will certainly fall into recession next year, with developed countries around the world certain to follow.  While there was hope the Reserve Bank was succeeding in driving down inflation, this latest uptick in prices and overseas interest rates, will put the Reserve Bank under renewed pressure to lift domestic rates yet again.  Although the much talked about fixed-rate mortgage cliff seems to have been averted, where homeowners have faced the end of super low fixed rate loans and been forced to move to higher variable rate loans, pressure is emerging in the housing market.  According to figures from the research house, Core Logic, the number of homes that have been sold at a nominal loss, and which have only been owned for two years or less, has increased from just 2.7% to 9.7% during the June quarter.   Pressure is building most clearly in the sale of home units with 14.4 per cent of all unit sales across Australia selling at a loss during the June quarter, compared to just 3.8 per cent of all homes sold during the same time.  There also seems to be a trend where people who moved to the regions during the pandemic are starting to sell up and drift back to the cities.  Resales within two years of purchase, made up 11.1% of all regional resales, compared to a decade average of 7.2% per year.  A rare bright spot for investors remains the hefty returns to shareholders with Australia’s largest listed companies paying out some $21.7 billion during the last week in September, by way of improved dividend payments.   BHP paid out $6.34 billion to their shareholders via a $1.25 per share dividend, Fortesque Metal paid out $3 billion via a $1 a share dividend and after posting a record-breaking profit, the Commonwealth Bank of Australia paid out $4 billion by way of a $2.40 a share dividend.   The information provided in this article is general in nature only and does not constitute personal financial advice.  

Federal Government’s October 2022 Budget

Federal Government’s October 2022 Budget

Economy

A sudden uptick in the unemployment rate and slower economic growth combined with continued strong inflationary pressures are set to test the Australian economy during the next two years, according to the Federal Government’s 2022 October Budget. While record commodity prices and higher Government revenues have provided some relief reducing the annual budget deficit from $78 billion to $36.9 billion, the economic outlook remains uncertain. Government spending will continue to outpace revenue with Canberra doing little to address the long-term structural difficulties contained within the budget, despite trying to restrain spending in order to limit inflationary pressures within the economy. Perhaps more importantly is the very real possibility that the Australian economy could tip into recession next year with unemployment set to spike at 5.5 per cent while economic growth is expected to slow to just 1.5 per cent. Global political and economic uncertainty cast a long shadow over this budget, with the Government allocating some $1.4 billion in aid to Pacific nations during coming years – one of the few areas of higher Government spending. Despite keeping a tight hold on outlays, the budget centrepiece is a pledge to build 1 million new houses across the nation during the next five years, in an attempt to alleviate the country’s chronic housing and rental shortages. Nonetheless, households will continue to face their own tough budgetary realities with energy prices tipped to explode by more than 56 per cent in the two years ahead and real wages expected to continue to fall. Fearful of pushing domestic inflation even higher, the Budget contains no cash relief or direct subsidies for households facing increasing cost of living pressures from higher energy costs, higher fuel prices and higher interest rates. Medicines will become cheaper with the maximum general co-payment for medicines on the Pharmaceutical Benefits Scheme cut from $42.50 to $30 while an additional 17 million scripts will now receive Government subsidies to reduce their cost to patients. In the meantime, the Government has left the door open to review the much-debated 2024 income tax cuts, which are focused on providing tax relief for high income earners, particularly wage earners who have been adversely impacted by ‘bracket-creep”. The former Government’s much talked about commuter car park programs have been axed along with $1.7 billion slashed from various Government regional dams’ projects over the next four years and $4.6 billion over the next twelve years. While the Government has promised to spend $1 billion to create 180,000 additional fee-free TAFE and vocational training places, little has been done to support small business, emerging from two years of pandemic created restrictions and tough trading conditions. Nonetheless, the whole country will benefit from the Government’s commitment to move to a low carbon economy and its “Rewiring the Nation” program is set to improve energy transmission and connect new renewable energy projects to the nation’s electricity grid. $800 million has been set aside for Powering Australia, which plans to cut taxes on electric vehicles, invest in a national EV charging network and provide solar battery storage for up to 100,000 Australian homes.     The information provided in this article is general in nature only and does not constitute personal financial advice. 

The effect of rising inflation

The effect of rising inflation

Updated on Budgeting, Economy

The word ‘inflation’ doesn’t only dominate business news headlines but finds its way into general news reports too. So, what is inflation and how does it affect you? In simple terms, inflation signifies a rise in the price of goods and services, meaning you pay more for every purchase you make. Does the US influence Australia’s inflation rate? It is not a surprise that countries in today’s world are more connected than ever before. Therefore, a rise in US inflation rates will impact the Australian economy too. However, the degree and timing of its impact will vary. For example, a rise in labour costs in the US may have a limited impact on Australians; however, an increase in the price of iPhones or Nike shoes in the US will reflect in their price in Australia too. What will be the impact of rising US inflation on Australia’s economy? Interest rate movements made by the US Federal Reserve Bank (the Fed) are closely monitored by central banks worldwide, including the Reserve Bank of Australia (RBA). Over the past decade, many developed economies, including the US and Australia, have reduced interest rates to boost their economies. With rates rebounding from all-time lows there is an expectation that rates will continue increasing due to the strong performance of those economies. Quite often when the Fed increases its interest rate, Australia is quick to follow suit. The cost of borrowing funds will increase, leading to a rise in the inflation rate, making goods and services more expensive. Rising inflation rates can also negatively impact the Australian dollar, where one AUD buys less USD than it may have done previously. What will be the effect on investors? A rise in inflation affects investment markets negatively due to higher interest rates, volatility in the economy and uncertain share prices. For some investors, rising interest rates mean paying more interest on their home loan, which reduces their disposal income and, in turn reduces their capacity to invest. For retirees, an increase in the price of goods and services at a time of share market volatility can lead to having to sell more of their investment assets (potentially at a loss or reduced profit). Also, there could be uncertainty in dividend income, which many retirees often rely upon. Retiree investors will have fewer years to recover from a drop in their portfolios compared to younger investors. How should you prepare for a rise in inflation? It is important to first analyse your personal cashflow situation to understand where your money goes. Consider fixing at least part your home loan to limit your exposure to rising interest rates. Reconsider new personal loans, such as car loans. Do you need to take on new debt when interest rates are likely to increase? For the risk-taking investor, it can be tempting to invest more money into shares when prices are falling, but always consider averaging your position to avoid market timing risk. For investment purposes, consider having exposure in well established companies “blue chip stocks” vs riskier stock. Investors often find comfort knowing their funds are exposed to good quality companies with strong balance sheets. If the thought of rising inflation leaves you feeling unsettled, be sure to talk to a professional adviser. Your adviser will review your financial position, your ability to meet your financial obligations, as well as identify strategies to outpace inflation.   The information provided in this article is general in nature only and does not constitute personal financial advice.

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