ECONOMICS POLITICS AND THE FUTURE
This weekend saw the political landscape change forever!
Liberal seats fell like pins in a bowling alley, not by Labor Party candidates but by a tsunami of teal independents. Even the Labor Party suffered at the hands of the Australian people’s disappointment, with the two major parties disconnected from their constituents and only winning just 31.8% of the primary vote! All said and done it looks like, the Prime Minister Elect, Mr. Anthony Albanese, will form a majority Labor government, the first in over a decade. The Labor government will come to power inheriting a Trillion AUD$ debt at a time that brings with it greater challenges than ever before both domestically as well as internationally.
So what will the future hold for Australian business owners and the Australian People? Perhaps the following will help!
Last week I had the benefit of listening to Paul Bloxham, chief spokesperson for HSBC on forecasts and trends for the Australian and New Zealand economies and their interaction with global financial markets and international economies. He is a key spokesperson for HSBC’s unique view on global commodity markets. Paul has a unique talent in simply explaining the vastly complex nature of global and domestic economies in such a way that anyone could understand him, but more importantly what he is saying. Here are the key points and takeaways I got from Paul’s presentation, as well as other economic commentators and my own observations and comments.
- The global economy is likely heading into a global recession. The main attributes are:
- The impact on business and investor confidence of the Ukraine v Russia War and China’s continued push to establish and strengthen its military presence in the South China Sea and the South Pacific.
- Continued supply chain problems are set to get worse as major Chinese ports are locked down due to China’s ZERO COVID policy. In fact, 1,826 container vessels were waiting outside of ports worldwide which is 20 percent of all container vessels globally, and of those 506 vessels are waiting offshore at China’s ports which represent 27.7 percent of all the ships waiting outside of ports around the world.
- Much higher than anticipated inflation across all the major global economies. COVID and other factors caused a worldwide increase in demand for manufactured goods. Supply chain problems have caused a material drop in the availability of manufactured and other imported goods. Increased demand and decreased supply has driven prices up.
- In western economies, higher than expected inflation has, in turn, meant that the buying power of “wages” has not kept up with inflation creating a growing pressure for increased wages and adding further inflationary pressure.
- The central banks in all the major global economies are increasing interest rates as monetary policies are put in place to reign in inflation.
- Australia will follow US and UK with inflation and interest
- Due to increasing interest rates and an overall decrease in investor confidence the cost of property is expected to come off 10% – 15% over the next 18 to 24 months.
- Due to global economic uncertainty, there will be a move back to the more secure US $Dollar.
- A strengthening US$ will see the AUD$ drop with some predictions down to 1 AUD$ = 0.68cUS$
- Supply chain issues are growing, so supply costs will continue to go up.
- It is estimated that the cost of fuel will also continue going up to $2.70perLtr so transport costs are expected to increase by est 7%
- Inflation in the UK is running at 9%p.a.
- Inflation in the US is running at 8.5%p.a.
- Inflation in AUD is expected to reach 7%p.a.
- Woolworths is predicting the average food basket to increase by 25% over the next 12 months
- Inflation in AUD is expected to be 21% over the next 3 years
- Keep in mind that most commercial rentals have an annual increase fixed at a minimum rate (typically 3%) or CPI, which is the greater. Given the above-predicted inflation rate of 7% – 8%, we could see rents increase equally.
- Interest rates around the world will continue to rise because of inflation and world economic gloom.
- There are predictions of 14 to 15 interest rate rises predicted over the next 12 months by the Reserve Bank ranging from 5 to 50 basis points.
- Some predict Australian interest rates for home loans will rise to between 5% – 8% by December 2023
- Unemployment is tipped to be 3%, the lowest ever. This in turn is causing higher wages as employers scramble to secure new and keep existing employees , so
- Employment costs are expected to go up 4% to 5% annually over the next 3 years
- Already there is a current wage increase push by certain unions, of circa 25% over a 3 year period
WHAT TO DO NEXT
- Understanding the impact, the above economic circumstances will have on you, your business, your customers, and their customers.
- Increasing interest rates will result in reduced consumer spending as discretionary spending cash decreases
- Reduced demand, increased operating costs, higher rents, higher interest costs, etc will result in a growing number of people unable to pay their mortgages and a growing number of business failures
- What strategies policies and procedures will you put in place to secure your business’s continued profitability, continued cash flow, working capital, and minimise bad debts
- Over the next 3 to 5 years the main strategies you need to implement to stay ahead of the above predictions are:
- Whether you are heavily geared or not, pay down as much debt as you can as quickly as you can to reduce the financial impact of rising interest rates.
- Regularly increase your prices by small increments to pass on increasing costs
- If you cant increase your price then look at
- what else can you sell to your clients/customers
- can you increase the number of times they buy from you
- Reduce your own costs and/or increase the value you get from each dollar spent.
- Tighten up and ruthlessly force customer credit terms and debt collection. Better they have cash flow shortages than you. Remember a sale is not a sale until the cash is in the bank.
- It could be time to cash up (some say it’s already too late).
It will be interesting to see what the Albanese Labor government does to meet their election promises whilst at the same time balancing the budget and reducing the deficit.
More taxes, or more changes to the current tax system?
Only time will tell.