What's ahead in 2023

There is always a temptation to look at a year in isolation, rather than placing it in the context of a slightly longer view, maybe within the last — not to mention the next two, three or even five years. So, it’s not surprising to see commentary for 2023 suggesting home prices continuing to fall, global stock markets to crash, companies to be hit by rising interest rates and inflation and the continuing challenges from energy prices affecting households and businesses.

Sure, it’s very useful to know what’s just around the corner, but also to be able to place it in a larger or longer context. And while 2022 may have been a difficult year, it also followed a couple that were perhaps surprisingly good as it turned out. Who thought a global pandemic would be a reason for global markets booming?

So, it should not come as too much of a surprise that after such a large amount of fiscal stimulus, a correction is occurring. What may have surprised is the speed with which the correction came and the rapidity of the onset of inflation as well as the rate of central bank interest rate rises around the world.

This has led many to already speculate that central banks, the RBA included, may have now overreacted, following a delay in ‘pulling their monetary policy interest rate lever’ sooner in 2022. What may now follow is a rapid slowing of global economies, perhaps even some falling into recession.

Recession in Australia next year?

So, if a recession is on the horizon, why are many Australians spending on the not so essential items; airline travel is at capacity and beyond, with fares at record levels. We are also hearing of an expected bonanza in spending over the Christmas period. Perhaps there are a number of reasons, some rational and others perhaps a little less so.

In the latter category, as we enter the Christmas period, most Australians who want a job, have one. It may not be the job they want, but they are employed and receiving income. This contributes to a sense of well-being and comfort in being able to meet the cost of essentials, particularly home loan or rent payments. There is also a significant amount of savings held in bank accounts, as well as many home loans ahead of scheduled repayments.

The less rational part of this is that while, there are predictions of difficult times ahead, the current sense of well-being, for some may be saying, ‘we’ll address the difficult time after Christmas’. This may be a way of rationalising the behaviour.

A more rational reality may be the belief that we are in for a gentler landing in 2023; that eight-successive monthly rate rises, which have added a full 3% to the cash rate will take effect in 2023. There is some evidence, albeit scant, that this may be the case, with the RBA, reducing the rate at which it increases to 0.25% over the months of October, November and December following the four months before of 0.50% each and a start back in May of a tentative 0.25%. Time will tell and we may have to wait until February 2023 to see the next step, as traditionally the RBA does not meet in January.

With regard an inflation number, it may not be until late January 2023 that we see a number for the December 2022 quarter, which may also be influenced by the expected Christmas spend. It may not be until we are a little into the first quarter of 2023 that we get a better feel for where all is headed.

What about outside Australia?

There is growing talk of a more likely outcome for the US and Europe of a recession, however, economists are suggesting it could be sharp and short lived.

Again, it will be important to see the economic numbers to back this up and once more these will be influenced by the December/January Christmas holiday period with the US providing more regular data; monthly, rather than quarterly.

Key indicators to keep an eye on

Inflation is the first, the second and… you guessed it the third; both here in Australia and in particular the US as some inflationary influences overseas are imported to Australia.

Keep an eye on China to see how the pandemic is being managed. Recently there appears to be a lessening of the lockdowns of entire populations to contain the spread. This could be good news for supply chain normalisation. There is also an apparent thawing of Sino/Australia relations, which could be good for Australian exports.

The Ukraine is also an important set of circumstances to keep an eye on as it and Europe go into winter, the supply of energy – coal and LNP, which benefit Australia will be important. However, this could turn around if tensions ease, returning to a more normal footing.

In Australia, we are benefiting from:

• Full employment, though it is creating staff shortages in some sectors and unemployment is expected to rise in 2023.
• Companies have strong balance sheets/low debt, though it will be important to watch the results announced in February following December half/full-year results.
• Cost of living pressures coming off, apart from the anticipated energy price rises, many food stuffs have recently reduced in price (no one is talking of the $12 lettuce and some seasonal pre-Christmas food items are proving to be less expensive that suggested post floods).
• Federal Government debt receiving a tailwind, reducing off the back of higher than budgeted resource prices, particularly coal.

So, February/March next year is shaping up as the time to take stock of where we are, having received updated economic numbers and having possibly seen the reduction in interest rates rises or at least a stabilisation around 0.25%, which will be a positive indicator that the RBA believes inflation is in check. Then, in May another Federal Budget.

In all of this the thing to avoid is complacency; accepting inflation, feeling that it will be alright if I have a job nothing can go wrong or that, higher interest rates will save investment portfolios and SMSFs heavy on cash (and that there is no need to review my SMSF).

It’s times like these that a SMSF review is important, so to talk with an accredited SMSF Specialist in your area, click here to use SMSF Connect’s Find a Specialist tool.

So, as we come to the end of 2022, I wish you, your family, colleagues and friends a great time over the break and into 2023 and I look forward to continuing to share my thoughts with you over the coming year.

Until then, happy and successful investing.
Ian

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Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.

Source: https://smsfconnect.com