Economic commentary

The world is in economic hiatus at the moment and the economic future is uncertain.

We have economic data such as cost of living, interest rates, inflation, employment figures that suggest that the economy we have been living in the past 10 to 15 years (discounting the GFC, as Australia was largely insulated from that event) is not as stable now and into the near future.

Despite the recent lowering of Australia’s inflation, the RBA again raised interest rates by .25 of a basis point totalling a 3.75% increase in the home loan interest rate. This rate rise will impact heavily on both small business and homeowners spending capability. From my research “The latest lending indicators from the Australian Bureau of Statistics (ABS) show that the average mortgage size (for owner-occupier dwellings) was $601,797 in November 2022 — up from $594,938 in the previous month” –https://mozo.com.au/home-loans/articles/borrowing-big-australia-s-average-mortgage-size-is-now-just-shy-of-600-000.

This figure of $600,000 average home loan will by my calculation increase household costs by around $18,750 annually in interest payment alone. My research also indicated that approximately 800,000 homeowners have loans at this average level of borrowing.

Using the above information, this would suggest that $15,000,000,000 is extracted out of the discretionary spending from local economies.

This coupled with the borrowing costs on small to medium business will impact heavily on those little things we currently take for granted, such as a night out, coffee with friends, that extra bit of home improvement, etc. This affects all business, as the consumers stop spending.

Why is this happening, controlling inflation is accomplished by reducing money flowing through the economy, either by increasing interest rates or restricting government spending/increased taxes.

At the moment, the only lever being used in by interest rates, and homeowners and small businesses are the ones being hammered. This is because it is a blunt instrument that does not distinguish between industries or individual circumstance.

From a business perspective, what can a business do to protect against the withdrawal of this discretionary spending.

Firstly, the business owner/managers should conduct a thorough analysis of the business cost structure, removing inefficient and unproductive assets, looking at current business productivity and improve business practices to improve efficiency. It can also look at product lines and analysing those product lines that maximise margins and sales volumes.

This will allow the business to improve productivity and maximise profit margins, both gross and net profit.

There are a number of support networks, both industry associations and organisations such as the Institute of Management Consultants – https://imc.org.au/ who can provide a range of support services.

From a global perspective, there are significant overseas economic event such as the three national and multinational banks who have been impacted in recent weeks that will impact on overall consumer demand and credit risk. This coupled with international governments investment in addressing the impact of the pandemic will take a while to flow through the economy. My other concern is the impact of government investment/support in green energy projects that remain ongoing (remember that the more money invested will increase inflationary pressure) and the potential to drive the cost of energy to industry and households upwards. This places potential to add further financial stress to households and small businesses.

All I can say is that we need to start seriously looking at our productivity and cost management, because I think that the next 12 to 18 months will be wild ride, as only those businesses that really understand their business performance will have a chance to survive and prosper.

Goodluck