Good afternoon as we enter the last few weeks of the financial year.
It was great to see so many of you at the Vivid function last week and to see the city coming back to life after the Covid lockdown.
With our borders open and migration re-established, we should be able to get back to full productivity and the economy firing on all cylinders quickly. In the immediate the key economic issues is market uncertainty on future interest rate policy which is delaying investment decisions particularly in the building sector and leading to a shortage of new housing as our population grows again.
Fair Work Australia (FWA) Award Wage Increases
Fair Work Australia increased the minimum wage by a higher than expected 5.75%, for those on the minimum wage to $882.80 or $23.23 per hour starting 1 July 2023. In addition, certain sectors including aged care received a 15% pay increase or were reclassified into a higher paying award. While it is a positive social outcome in improving the income of the lower paid in our community there was no requirement for this to be matched with improved productivity. Without which these increases will lead to higher costs for business leading to higher prices for their products which in turn fuels inflation. On a positive note, the increased wages should reflect in greater spending in the economy and to some extent offset the additional housing and electricity costs created by higher interest rates.
RBA Interest Rate Increases
The RBA responded to the FWA decision two days later increasing interest rates by 0.25 to 4.10% sighting that one of its main reasons for increasing interest rates was the rise in wages without a corresponding improvement in productivity. One day later the quarterly GDP figures for the country came in below estimates at just 0.2% which wasbordering on a negative return showing the economy slowing rapidly due to discretionary spending being reallocated to mortgage and increased rent payments. Clearly it would have been helpful for the RBA to have had this data prior to the interest rate decision when a different decision may have been made.
Effectively we have different parts of the Federal Government moving in different directions with a foot on the break (RBA) and the accelerator (FWA) at the same time. Consumer discretionary spending has naturally declined reflected in market updates from Adair’s, Harvey Norman and Dominoes.
Over time consumer confidence should improve as interest rates are projected to fall in line with inflation next year with CPI budgeted by Treasury to fall from 6.25% to 3.5% over next 12 months. The Treasurer will be deciding on the new RBA Governor in the next few weeks which should reduce some of the market uncertainty. What is clear it that we need a much more coordinated approach to managing the economy including looking at alternatives to just lifting interest rates to reduce demand. There are much more targeted options available which would assist in reducing excessive demand in discretionary spending while not damaging the economy through higher interest payments to residential borrowers and small business operators. The most obvious is to raise the GST on luxury goods to a level commensurate with other jurisdictions particularly in Europe where rates of 20% are the norm.
GST Rates – How does Australia compare? (Source: Tax Foundation)
US Debt Ceiling And Interest Rates
The US Congress extended the debt ceiling allowing the Government to increase its borrowings above $34T for at least another 2 years. This was naturally well received by equity markets as at least one aspect of uncertainty had been resolved. The VIX volatility index has fallen substantially indicating that there is less concern about adverse market movements.
Australian Volatility Index (Source: Market Index)
US CPI overnight had reduced to 0.1% for the month and the Federal Reserve did not lift interest rates last night and will probably hold rates for the foreseeable future. At the same timer China has dropped a key short term interest rate to stimulate their own economy so all in all we should be at the top of the interest rate cycle.
As a leading indicator the US S@P 500 is now up 20% from its October lows reflecting growing confidence in future earnings. At this stage the gains are dominated by 7 large Tech companies with the next phase of recovery being a general improvement in the share price of traditional mid-market stocks.
US Equity Markets past 12 months (Source: Trading Economics)
Year End Tax Planning
We have two weeks to finalise year end positions
- Super Contributions
- Prepay bills
- Buy Assets up to $20k for instant depreciation write off
- Sell loss making shares to offset against profits to neutralise CGT
In Conclusion
We will be working around the clock as usual for year end with the offices open Thursday evenings and Saturday mornings.
Full details on website including making appointments www.virtueandpartners.com.au
With our best wishes
Tony and Fiona
