My pessimism often gets the better of me, the convergence of dramatic factors that could result in a recession or downturn are clear, but not occurring, yet.
The economy is humming along for now but I do not see a soft landing (economist speak for no recession) being possible, instead I can't see why we would not see a hard landing (economist speak for recession).
The main things that weigh on this pessimistic view are spending, asset prices, rates, and productivity.
Spending, I've talked before about a consumer led recession starting or happening in 2023 and I believe this to still be true. We can already see in sectors like retail, hospitality, trade that they are being impacted. More of these businesses are unfortunately closing down. But overall spending remains strong according to the Australian Bureau of Statistics, and this is a problem for the RBA as one of the main reasons to increase the cash rate is to 'destroy demand' i.e. make people spend less to reduce economic activity and slow inflation. I think spending data will show a sharp decrease leading up to Christmas and also a data point why the RBA will hike rates again.
Asset Prices, low rates are good for assets like property and stocks, conversely high rates are bad for asset prices like property and stocks. This is not clear right now but will become very clear later this year and in 2024 as people realise the current level of interest rates are here to stay for a long time, and likely to go up next year, I would not be surprised to see a 5% cash rate in 2024. Why invest in an investment property earning 4% net yield and the hassle or renting it, when you can earn over 5% in a savings account? Capital growth, yeah maybe, but there is risk there, and that question might lead many people to just stick their cash in a bank rather than a property.
Rates, are going to be higher than we expect for longer than we want. Prudent business owners would be planning for a 5% cash rate next year. If this does not happen then at least you will have more liquidity in the business to capitalise on opportunities (like buying a business, which I can help get finance for) and be covered with cash if things to go bad.
Productivity, the recently release report The Intergenerational Report was a doomsday document. It clearly said if we do not improve productivity we are in for bad times. We will need to produce more, work more, and do more in the coming years to have any resemblance of quality of life and living standards that we enjoy today. This is a huge task and for business owners is a alarm bell that efficiency in your business is critical, this also relates the 'capital efficiency' like metrics 'ROA, return on assets' and 'liquidity ratio' and 'FCF, free cash flow' all of which are health indictors of your businesses use of capital (money). If you want to get an analysis done on your business financials next time you are buying an asset or borrowing money for working capital I would be happy to help and talk through the results with you.
These are challenging times right now, so here are some important finance, business and economics stories to be across:
Small business index
Good news on inflation
New car sales rise
Power price update
Read more below.
Small businesses grew their sales 6.3% year-on-year in June, according to the latest Xero Small Business Index. While this was the smallest rise since February 2021, Xero said businesses were still growing their revenue even allowing for inflation. Businesses were paid in an average of 19.9 days in June, compared to 23.2 days in May. Xero said this sharp improvement in payment times was "mainly due to the temporary impact of the end of the financial year" and would likely "return to a more usual level" in July.
Wages rose 3.1% year-on-year in June, which was significantly lower than the average in the last six months of last year (3.9%) and almost identical to the long-term average (3.0%). "This result is positive for the inflation outlook and suggests that the wage rise pressure that had been building in 2022 has dissipated," according to Xero. One negative, though, was that jobs growth in June was only 2.5% year-on-year, compared to an average of 3.4% last year. As a result, "small businesses looking to hire continue to find it hard to recruit staff", Xero said. I can help you get a business loan
More evidence has emerged that there’s light at the end of the inflation tunnel, with Australians' inflation expectations falling noticeably over the past nine months. Roy Morgan has reported that inflation expectations fell to 5.2% after peaking at 6.5% in November 2022. This was based on a survey of 5,968 Australians aged 14 and over in July.
In a recent statement to the House of Representatives Standing Committee on Economics, Reserve Bank governor Philip Lowe said high inflation "is corrosive to the healthy functioning of the economy" and makes life harder for everyone. “And, if high inflation does become ingrained in people’s expectations, history teaches us that the end result is even higher interest rates and even greater unemployment to bring inflation back down. It is for these reasons that the Reserve Bank Board remains resolute in its determination to return inflation to the 2–3% target range within a reasonable timeframe and will do what is necessary to achieve that outcome." Inflation in the June quarter was 6.0%, while average wages growth was 3.6%, according to the Australian Bureau of Statistics.
Australian motorists bought 96,859 new vehicles in July, beating the previous July record of 92,754 that was set in 2017. The Federal Chamber of Automotive Industries (FCAI) also reported that 14.7% more new vehicles were sold in July than the same time last year, with every state and territory reporting increases. FCAI chief executive Tony Weber said part of the reason for the strong sales result was the reduction of supply bottlenecks, allowing more supply to come to market.
“During the past 12 months the issue has been one of securing supply for consumers, however as these pressures ease, we are starting to see a return to more stable market conditions,” he said. “Many of these vehicles were ordered several months ago, so it is important to monitor the broader economic conditions through 2023 and their impact on private and business demand.” The five most popular marques in July were Toyota (19.8% of all sales), Mazda (8.6%), Ford (7.3%), Hyundai (6.7%) and Kia (6.3%). Contact me if you need a company car
The head of the Australian Competition & Consumer Commission has said some small businesses are paying unnecessarily high energy prices, in light of some recent price increases that are 10-20% above the regulated safety net. “We know that many Australians are likely paying more for electricity than they need to because their recently increased rates are higher than the safety net built into standing offer contracts,” commissioner Anna Brakey said. A regulated safety net applies for customers on 'standing offer contracts'; but not those on 'market offer contracts'. “The government safety net price for electricity is there to protect you, and you should not be paying more than it,” Ms Brakey said. “The case for switching to a different energy company is strong because the cheapest offers in the market appear to be reserved for new customers, rather than existing ones. We strongly encourage households and small businesses to use the government comparison sites Energy Made Easy and Victorian Energy Compare to find a better offer.” Recent ACCC analysis shows that 90% of currently advertised market offers are below the 'reference price' (i.e. the regulated standing offer rate).