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As I See It: December 2021

Greetings and Happy Christmas to you all!

It does feel like this has been a particularly long year as we work through the restrictions caused by the Coronavirus and look to forward to a peaceful break over the Christmas period. A particular welcome to our overseas and interstate clients who we very much hope to see face to face again next year. It was great to see a full house for the Client Christmas function at the Manly Skiff Club last week and I detected a growing optimism that we can, as a community recover quickly and bounce back from what has been a difficult two years around the globe. That said there is still quite a lot of uncertainty in the Northern Hemisphere with Omicron and a cold winter so we must remain vigilant in ensuring we do all we can to limit any further risk to our community domestically including getting booster shots where possible. We are limiting unnecessary international travel until at least Easter and persevering with ZOOM as an effective and efficient medium for communicating promptly with clients.

Supported by historically low interest rates, both property and shares have increased significantly for clients over the year which provides a growing buffer of equity to support lifestyle choices down the track. In context this growth equates to around $2 Trillion Dollars or nearly the size of the Australian Stock Market and while not shared equally, this does provide a strong asset base for further investments. The corollary of this is that the Federal Debt is anticipated to peak at $1 Trillion Dollars so while the community has benefited from the growth in assets, the Government (both Federal and State) has ended up with the debt by supporting the community through a period where many were unable to work due to no fault of their own. The Mid Year Economic and Fiscal Update (MYEFU) due out this Thursday will provide an important update as to the current projections for the economy for next year. With a Federal Election due by late May 2022 the country will go into caretaker mode shortly and major policy decisions delayed until a result is determined.

Residential Property Growth
Source:  Corelogic Dec 2021

What has become apparent more recently is the historically high level of savings in the community caused by the lockdown, which should lead to increased spending and especially travel when the restrictions completely normalise. We are seeing similar intentions in the business community with Capex budged to grow by a strong 16% next year and unemployment to continue to fall towards 4% (effectively full employment). This is not without its own challenges with labour shortages and additional supply chain costs raising the outlook for short term inflation. In context the base number for calculating inflation 12 months ago was badly skewed with the global lockdown and as such some of the media around 40-year inflation highs both domestically and in the US should be seen in this context. The immediate need now is to get our borders open safely and welcome back students and migrants who are crucial to meeting labour supply shortages. Historically Australia welcomes 200,000 migrants a year and last year our population declined for the first time since Federation.  We should anticipate a big catch up over the next 3/5 years which should help labour shortages and reduce inflationary pressure.

Australian Population Figures
Source:  ABS

Equity markets have drifted over the last few weeks with a sense that the easy gains have already been made and a period of consolidation the most likely step in the immediate future. The debate about whether short term inflation will continue to increase causing interest rates to rise more rapidly than expected remains the key issue for market analysts. The alternative view which remains prevalent is that this inflation is just transcendently due to supply shortages and with improvements in technology leading to cost reductions inflation will stay within the 2/3% band targeted by the RBA. The truth is probably somewhere in between and a slow increase in interest rates in 2023 should be seen as a positive for confidence in the growth of the economy. A good guide is fixed mortgage rates offered by the major banks which have continued to rise over the last few weeks.  Our mortgage business has been busy locking in rates and now would be a good time to review your future requirements. Haydn currently has some good options available and welcomes your enquiries haydn.dale@virtueandpartners.com.au.

Owner Occupied Interest Rates for Interest Only Loans
Source:  Canstar

We will look to break for Christmas for a couple of weeks and re-charge the batteries. Our mission to provide relevant and reliable financial advice supported by excellent client service remains unchanged and the business continues to grow strongly. We welcome new referrals via Fiona.goodland@virtueandpartners.com.au and are still taking on qualified new clients. Let’s hope we can get back to normal living next year and plan for a healthy and prosperous future.

With our best wishes 
Tony and Fiona 

Posted by Dr Tony Virtue, Principal


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