The global economy has seen some challenging times in recent months. We started off in July generally strong in markets across most asset classes but the last few months have seen some challenges across most global economies. What has contributed to the turbulence we’re currently facing? Is it a phase, ready to pass us by or this is here to stay? To make sense of it all, let’s consider some key factors.
The Australian Economy
The Reserve Bank Board decided to leave the current cash rate at 1% at their last meeting. This is following the aggressive cutting of rates in June and July to try and drive economic activity. With growth subdued in the Australian economy and unemployment at 5.2%, it appears there’s enough spare capacity in the economy which invariably hinders wage growth and in turn hinders spending which is the original intent of any rate cut[1].
The government has increased the low- and middle-income tax offsets. This is available immediately once a tax return is filed. This means, for taxpayers earning less than $126,000, you could receive a tax relief of up to $1,080 for singles or up to $2,160 for dual income couples.
The government also introduced tax cuts for small businesses – reducing the company tax to 27.5% and eventually to 25% by 2022 for eligible businesses.[2]
The Global Economy
The US-China trade war escalated to a new level in the last few weeks, after the US signalling that talks were progressing well earlier in August. We’ve seen new tariffs levied on goods from both sides which led to increased volatility in the global markets in August and sharp declines across most indices in the global markets.
In the last couple of weeks in September, we’ve seen a pull back on some of the tariffs initially imposed, which has spurred on a little bit of market confidence that perhaps a deal may be reached soon.
Europe is having its fair share of economic problems with Bond yields low, inflation below target and economic spending well below target. The European Central Bank has floated the idea of another round of stimulus packages to try and get some economic activity. But, will it work? There seems to be a lot of stimuli in the European economy. Yet, we do not see any real positive trends in economic activity.
In replacing Theresa May as Prime Minister, Boris Johnson promised to carry out Brexit with or without a deal. As we currently stand, we are still nowhere closer to a deal between the UK and Europe and to top it off, there’s now a potential constitutional crisis in the UK. As it stands, there’s a proposal from the Boris Government to hold early elections to try and resolve the matter. That might give businesses some indication of an exit strategy from Europe. But we are yet to have this passed as the government failed to reach the two-thirds majority needed to call early elections.
What does this all mean?
Markets are rapidly changing, and these changes are not necessarily backed by data but rather sentiments and tweets. It is now more important than ever, to have a strategy behind every single investment decision you make. Although interest rates are falling in most developed economies, consumer confidence remains low. For as long as consumer confidence remain low, people may tend to save the extra cash received from the tax cuts and low interest rate environments and pay down debt faster, than buy that new car, new wardrobe or do the renovation on the house. Without that extra spending, businesses will have no need to hire extra staff to deal with the extra demand pressures. This will in turn leave wage growth either stagnant or perhaps even drive them lower in some sectors of the economy.
For clients under the retirement age, it is now important to consider longer-term strategies as opposed to higher risk strategies. Time is now your best friend. The sooner you start accumulating wealth through investing, the higher your chances will be in meeting that income target when you retire.
It is important to consider different structures in assisting in growing your long-term wealth to meet your income needs. For example, it is important to understand the benefits of superannuation – in that it presents an attractive tax position for most taxpayers. With income tax at 15% in the accumulation phase and 0% in the pension phase, superannuation continues to be the most tax-efficient vehicle to grow wealth for your future income needs. It is important to note that incomes received from superannuation after age 60, are tax-free. If you’re not paying tax on the income after age 60, you may not need to have a larger asset base to draw the same level of income. Meaning, you could take a lower risk position than you’d normally do in a highly volatile, high risk market condition.
For retirees, as interest rates get lower and lower, the temptation to invest in equities and take on a bit of risk for a higher return increase. But, is the volatility and potential risk out there going to give you a desired return in the short-term to compensate for that risk? Perhaps, it is important to consider other strategies to maximise the income required to fund your retirement income needs.
This report may contain information sourced from research through our research house Lonsec and the Australian Taxation Office. It may also contain our in-house assessment of the global economic outlook. This information is general in nature and does not take into account your personal circumstances. Before you implement any changes to your current situation, we recommend you speak to us.
