By Michael Burke, Director of Strategy at Beyond Advisors
Growth forecasts for the Australian economy are seen to be largely on trend at 4.1% (OECD forecast) with increasing risks to the downside. Bearing this in mind, we need to be cognisant of how consumers will react to the risks posed by supply chain disruptions and rising prices.
Major risks to growth forecasts
Supply constraints driven by ongoing lockdowns in China — as their policy response to COVID evolves — combined with the impact of war in Ukraine, economic sanctions on Russia and weather events in Queensland and New South Wales signifies there is plenty to monitor over the coming months.
Wage and price pressure appears to be growing. With no recent experience around these issues, the outcome could be unpredictable i.e., price and wage pressures could be faster or slower than expectations. Businesses need to remain alert to these developments.
The RBA has pulled the trigger on interest rates with a 0.25% increase in May. Expectations vary across the various forecasters; Westpac expects rates to rise a further 1.40% by November 2022. How this plays out and influences consumer spending, asset prices, exchange rates and inflation will be an interesting watch.
Consumer spending expectations
Australians have built up a large cash buffer during the pandemic, their willingness to spend this buffer will have a significant effect on demand forecasts moving forward. The impact of an interest rate rise coming earlier and potentially more quickly than expected is yet to flow through to already falling consumer sentiment.
Tips for businesses in the current climate
Quality relevant data is king
- Monitoring supplier prices and their consistency of supply will be key. Keep open lines of communication with suppliers to get the best feel for what is or isn’t coming.
- Remain nimble on your pricing, keep lines of communication with major customers open so that if you need to increase prices it’s not a surprise.
- If heavily exposed to movements in exchange rates or asset prices, you will want to keep an eye on the impact of rising interest rates. You may need to protect your business from short-term impacts of significant movements, such as use of hedging strategies, ensuring prices remain flexible and not locked in for long periods.
- Regularly monitoring forward order book trends will be critical in indicating market shifts and enabling businesses to respond with adjustments to their cost bases should trends look threatening.