So the boom has ended and now a recession has been predicted, but why?
There is a multitude of reasons, but major businesses have been reluctant to invest which is driving the rest of the economy down.
Businesses only tend to invest when their rate of return is over 10% (based on long-term rates of returns when interest rates were between 4-6%). Having an interest rate of 2% is distorting their calculations. Also, most businesses are looking to cut spending, not increase spending.
So what does that mean?
It means that growth rates won’t improve unless non-mining investments pick up. So cutting the interest rates does little for businesses and actually could be a detriment to the economy.
Customer confidence must be lifted but, without the investment by business or government, we must expect a period of gradual decline for the Australian economy.
One-third of Australia is already in recession with trends of falling incomes weighing down on household wealth. Less than 0.5% of regions generated 20% of national income which shows growing inequality and dependency on the success of these few, which is worrying indeed.
So what do YOU do to protect yourself, your family and your business?
Firstly, be careful about having an interest only loan. The RBA states that this could get you in trouble if housing prices fall and the principle of the loan is higher than the value of the house, especially if interest rates then rise with the potential recession. It might also be the time to lock in that rate or look to refinance your old fixed interest loans if you have not already.
Look to minimise costs and look to competitors to get quotes for your everyday expenses. They will be rallying to increase their market share as they need to generate wealth to pay dividends to keep their shareholders happy.
Keep any portfolios balanced. Having a permanent portfolio can put you in good stead to benefit from highs and protect you from lows. This includes having investments in Cash, Stocks, Bonds and Precious Metals. An equal part in all will cover you for inflation (metals), deflation (bonds), prosperity (stocks) and recession (cash).
Start putting money into a mortgage offset facility or savings account where you can save and benefit from having something there for a rainy day.
Now is not the time for excessive spending, even though the government is pushing you to spend more. Why else would you suddenly get a $20,000 asset write-off as a small business? They need customer confidence to increase to keep the economy ticking over. Businesses are only taking advantage of these incentives if they have the expendable money, have calculated rates of return from these assets above the 10% and that the assets are paid off within 2/3 years of them buying them. Just in time for HSBC’s predicted interest rate hike.
Why are they predicting a potential recession?
The resource boom peaked in 2012 with the spike in iron ore, coal and commodity prices, and it is on its way down now. Foreigners (and foreign-owned companies) received the majority of this income not Australians directly.
Households are not in the mood to spend, and fear driven by a potential recession, they have started saving more. This means less spending on stocks and shares and less investment in businesses.
You cannot have a boom without a bust. Rudd held off recession by increasing government spending and increasing AU debt. But, with the need to go back to surplus, less government spending is going to lead to prices falling and interest rates rising – yes even the housing market could fall.
The Reserve Bank (RBA) worries that the heightened level of investor activity and borrowing could amplify the housing price cycle and increase the risk of significant price falls later.
So what’s the good news?
Did you know that private wealth in Australia grew 16% in 2014? Australia has been outpacing the rest of the world in terms of wealth growth and Australians have leapt 28 months ahead of their mortgage repayments. Falling interest rates have helped people run down their loan principle or helped them gain by using an offset and redraw facility.
Australia still has room to lower interest rates, but HSBC expects the 2% rate to be around until 2017 but with no further reduction. Well, that’s more of your loan principle being paid out of your family home or investment properties for that matter.
Commodity prices should continue to fall so less expenditure for you. Councils will focus on more upselling of transport, infrastructure and trying to bring in other income streams such as tourism. We should all benefit from these better networks.
The wise businesses out there are bedding themselves into their market, getting their customers on their side and reducing costs. After all, the best idea is to be prepared and if you satisfy customers, you are keeping your business in operation no matter what the climate.
If you need any help or advice on this matter or just want to understand how it will affect you personally, please contact us today.