In fighting their perceived battle against inflation and the wage price spiral, the RBA will continue to increase the cash rate until they change consumers’ minds to spend less money.
If people keep spending the RBA will keep raising.
This is the psychology of interest rates and prices. If rates are going up, the RBA knows and hopes that people will spend less.
If people spend less it should mean prices do not push higher, thereby fighting inflation.
Most data is showing weakening spending, and that at a per person (per capita in economist speak) has been negative and going backwards for nearly two years.
So theoretically the RBA might be able to cut rates, but they won't.
Inflation, specifically services inflation, is sticky. Which is another way economists talk and means that it is not going down easily.
The last mile in this inflation fighting crusade the RBA is on will be the longest and hardest, and it is very likely they will have to increase interest rates again.
In a worst case scenario the cash rate could get to 5%.
If you buy an apple, or a house, the money (credit or cash) you spend transfers to the seller and becomes their income. They then go and buy things.
I like to say that one person’s spending is another person income.
Spending is what drives economic activity, drives the economy, so the RBA is trying to reduce economic activity and spending, which could push the economy into a recession.
It is likely the RBA will point to inflation data to help justify the coming increases in the cash rate, but I would take whatever they say with a grain of salt.
It is important to remember that this is the same governor and board who said the cash rate would not increase to 2024. In retrospect that was a tragic mistake to make that statement, and who knows, maybe they will have to back track and cut rates if the global and local economy enter into a serious recession.
There might be really good buying opportunities in the chaos of the next couple of years. Buying property can preserve, and even grow wealth in tumultuous times, even when things look bleak.
As we come to the end of another financial year, these four stories give a good indication of how the economy and business sector are placed right now:
Construction prices rising
Inflation climbs to 3.6%
Payment defaults jump 69.4%
How SMEs feel about EOFY
Read more below.
Construction tender prices are expected to experience year-on-year increases in every capital city during 2024, according to the latest forecasts from property group RLB.
Adelaide (6.5% growth) and Brisbane (6.0%) are likely to have the strongest price growth, followed by Melbourne, Perth (both 5.0%), Sydney, Darwin (both 4.5%) and Canberra (4.0%).
Still, that's a slowdown from 2023, where capital city price growth ranged from 4.5% to 8.0%, and 2022, where it ranged from 5.0% to 12.5%.
“While continuing its contribution of approximately 10% of Australia’s GDP, the construction industry grapples with persistent influences of high escalation, industry solvency, low productivity, and labour shortages. However, the outlook for the construction industry is positive,” RLB director Domenic Schiafone said.
“Governments across all levels in Australia are prioritising infrastructure spending. This includes projects related to roads, rail, utilities, renewable energy and social infrastructure like schools, hospitals, and recreational facilities. This commitment to infrastructure development is expected to continue to inject significant funds into the industry, creating a steady stream of projects for construction companies.”
Inflation is heading in the wrong direction, with a tight labour market putting upward pressure on wages and spending.
Prices rose at an annualised rate of 3.4% in December, January and February, before rising to 3.5% in March and 3.6% in April, according to the Australian Bureau of Statistics (see graph).
Unemployment remained very low during that period, rising marginally from 3.9% in December to 4.1% in April.
The latest data show wages growth is high, reaching 4.1% in the year to March, although retail sales are low, expanding only 1.3% in the year to April.
Collectively, this data highlights why business conditions are challenging right now.
Businesses are dealing with both low sales and rising prices. At the same time, with the labour market so tight, businesses are struggling to find staff and are being forced to pay higher wages.
Small businesses in the hospitality sector face the greatest risk of insolvency over the next 12 months, based on the latest Business Risk Index from CreditorWatch.
CreditorWatch calculated that 7.5% of SMEs in the food & beverage services sector might fail in the next year.
The other sectors with the greatest failure risk include administrative & support services (5.5%), arts & recreation services (5.4%), construction (5.1%) and transport, postal & warehousing (5.1%).
B2B payment defaults were 69.4% higher in April than the year before, with businesses struggling to pay their invoices, according to CreditorWatch. This reflects the challenging conditions and also exacerbates them because businesses that struggle to collect on payments find it harder to remain profitable.
“While Australia is far from being in a technical recession, and Treasury is still forecasting positive, albeit weak, GDP growth over the three-year outlook, business conditions will feel recessionary to most businesses that rely on consumer spending, particularly those businesses located in mortgage belt areas of our capital cities,” CreditorWatch chief economist Anneke Thompson said.
Don't feel bad if you find the end of financial year (EOFY) challenging – because so do most entrepreneurs.
A Xero survey of more than 1000 small business owners and decision-makers found that 71% considered EOFY to be stressful and 56% had experienced mishaps in previous years.
Furthermore, 83% of respondents said they found at least part of the year-end process overwhelming, with the biggest sources of overwhelm being:
Navigating tax compliance = 33%
Gathering financial data = 32%
The time investment required = 30%
Staying on top of receipts = 28%
Balancing financial deadlines with day-to-day operations = 26%
Xero managing director Anthony Drury said EOFY can be a difficult period for small businesses, due to the greater pressure it places on time and resources.
“We always encourage small business owners to connect with their accountant or bookkeeper throughout the year to make EOFY preparations easier. EOFY highlights how important those relationships are as advisors can help to alleviate pressures, from managing records and financial statements to understanding tax compliance,” he said.
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