Eight potential economic events to be aware of in 2016

Government policies and changing market conditions are likely to affect Australians more significantly in 2016-17 than any other time in recent history, according to RSM Financial Services Australia. Individuals and businesses alike need to be aware of the potential fallout from these events, taking steps to protect themselves where necessary.

Evan Tsipas, principal, RSM Australia, said, “The Government and opposition have mooted certain changes, such as amending negative gearing provisions, and committed to others, such as increasing the assets test taper rate for Age Pensioners. The timing of these changes could coincide with other market forces to create a bigger effect on individuals than perhaps is priced in by financial markets.

“At the same time, a strengthening Australian dollar and continued economic woes in China will have a mixed effect for Australian businesses. Further, Australian Household Debt is high relative to income”.

“As a result, there has never been a more important time to keep abreast of economic news, and take steps to understand what it really means to your personal circumstances.”

RSM Australia has identified eight key economic changes and trends to be aware of:

1. Potential removal/amendment of negative gearing provisions

Negative gearing is in some respects a landlord subsidy, allowing property investors to claim losses on those properties against other income. The resulting proliferation of investors has helped push property prices sky-high, particularly in capital cities like Sydney, Melbourne, and even Brisbane. Removing the negative gearing provision is likely to see some investors leave the market and reduce demand at least at the margin.

Evan Tsipas said, “This could precipitate a correction in the housing market, which is good news for first home buyers but bad news for current home owners planning to downsize, and for those relying on investment property portfolios for superannuation and income supplementation.”

2. Age Pension asset test changes and the closure of car manufacturing

From January 2017, more people will qualify for the full age pension, as the asset test threshold rises, though the high taper rate will see many retired Australians receive a lower benefit. This is likely to coincide with the complete closure of car manufacturing in Australia, which will see many older workers out of work. These specifically-skilled, older people may find it difficult to get back into the workforce, and will potentially rely on the pension for income.

Evan Tsipas said, “Reports have predicted that the closure of car manufacturing could cost Australia around 200,000 jobs and almost $30 billion in lost economic output.* This is a significant blow to the economy and could increase the likelihood of recession later this year, or in 2017, coinciding with the backdrop of cuts to government spending.”

3. Potential rate cuts from two per cent to 0.50 per cent

If the Australian dollar continues to strengthen, some economists say the Reserve Bank of Australia (RBA) will cut interest rates below the historically-low current level of two per cent.

Evan Tsipas said, “The economy is still rebalancing as the mining boom fades and more emphasis is placed on services like tourism and foreign education. With the economy not performing at full capacity, the RBA is likely to cut the overnight cash rate further to improve borrowing and investment confidence. A lower interest rate is likely to push the dollar down, which will benefit industries like tourism, what remains of manufacturing, and higher education.”

4. Banks not passing on rate cuts

While official interest rates may go down, commercial banks are likely to avoid passing on some of the cuts to make up for rising loan delinquencies or higher wholesale funding costs.

Evan Tsipas said, “Judging on past behaviour by the banks, around half the cuts may not be passed on to customers. This will help banks offset rising delinquencies by boosting their profit margin on sound loans. At the same time, competition among banks remains fierce and there are good deals to be had for savvy borrowers.”

5. Stock market may be range bound

With falling interest rates making it difficult to get strong returns on savings accounts, investors may look to the Australian stock market. This is likely to offer good income opportunities but may be range bound for some time.

Evan Tsipas said, “Investors looking for higher returns may have to take on sensible investment risk. The volatile movements in the stock market that we have seen in the recent past may continue, however this volatility can bring opportunity. Investors may need to be very selective when investing for income, but we do see opportunities.”

6. A vulnerable US stock market

Despite a strong rebound recently, the US market remains vulnerable to a continued correction.

Evan Tsipas said, “The US Federal Reserve finally raised interest rates last year after keeping them at near-zero since 2008. However, US growth is still nascent and depends on keeping inflation under control. If rates keep rising in the US, then a rising US dollar may impact on US listed multinational corporate profitability, which is at near record highs. Thus our cautious view on US share market index.”

7. China’s struggling economy

China’s economy has been in trouble for some time and, while its economic woes could get worse, it will not be a surprise to the market.

Evan Tsipas said, “Those affected by China’s struggling economy, like minerals exporters, should already be well aware of the issues, and have contingency plans in place. This is not likely to be the source of a black swan event as problems have been well-telegraphed.”

8. Rising oil prices

Oil prices are likely to drift higher over a two- to four-year timeframe. At below USD$55 per barrel, the shale revolution has been snuffed out.

Evan Tsipas said, “Recent low fuel prices have been welcomed by motorists. However, as supply and demand come back into balance, Australians can expect to pay more at the bowser again. Our advice is to fill up your tanks now.”

* https://www.adelaide.edu.au/wiser/pubs/pdfs/wiser201453_closing_the_moto...

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