Dec 23, 2022  | Tags: 2023, Economy

Our insights

Years of buoyant markets, low interest rates and more recently skyrocketing house prices all came to a rude and abrupt halt in 2022. The party it seems is well and truly over. What’s ahead in 2023? How do you not just protect your wealth but advance it in an environment where many global economists are fearlessly trotting out the ‘R’ word - recession?

No-one knows for certain what lies around the corner but based on historical evidence, we can chart the course ahead with some degree of confidence.

That course suggests the likelihood of a significant ‘shift’ in the economy in 2023 as world banks, including the Reserve Bank of Australia, switch their focus from the current problem, inflation, to the next problem, avoiding recession.

Let’s take a look at some of the key aspects of the economy which are destined to shape the next 12 months.

Interest rates

Anyone with a mortgage knows how quickly interest rates have climbed across eight consecutive months in 2022 - the sharpest rise in 28 years.

The rises have been necessary to curb borrowing and spending that has fuelled inflation. The pain may not quite yet be over but most analysts agree the end is nearing.

RBA chief Dr Philip Lowe said in December, “The board expects to increase interest rates further over the period ahead but it is not on a preset course.

“It is closely monitoring the global economy, household spending and wage and price-setting behaviour.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” he said.

Most of Australia’s leading banks are expecting more rises in early 2023 with ANZ’s forecast of the cash rate reaching 3.85% the most dire forecast.

Rates are then forecast to ease in the second half of 2023 or by early 2024 at the latest.

Inflation

Interest rates have been pushed up in a bid to halt rising inflation.

We are all feeling the pinch at the supermarket checkout, even after foregoing those one or two ‘luxury’ buys we’d have normally bought.

Inflation reached a 30-year high in Australia in Q3, climbing to 7.3%. The RBA has steadfastly predicted it will reach 8% before rising interest rates begin to rein it in.

The likelihood is that inflation will plateau and eventually fall in 2023 as the economy cools.

The trick for the government is to keep Australia out of recession as spending dries up.

Recession

The danger of continuing to hike interest rates is putting the brakes on the economy too quickly, bringing it to a standstill and triggering a recession - the first created by the central banks for decades.

This brings us towards the ‘shift’ or pivot if you like that we spoke about earlier as central banks, having successfully slowed economies with their monetary policy, will ultimately face a new challenge.

Australians tend to be an optimistic bunch.

Despite some measures of consumer confidence, like the Westpac-Melbourne Institute Index plummeting to near recessionary lows in November, a 3% boost in December 2022 suggested many are starting to believe the worst is behind us.

Other predictions are not so rosy with Deutsche Bank warning in November that Australia would slide into recession in 2023 as unemployment rises.

The technical definition of a recession is two consecutive quarters of negative economic growth and while that may not be met to the letter, Deutsche Bank argues a 1% increase in unemployment would have the same effect.

Still others argue that even if overseas economies fall into recession, Australia can avoid the same fate because of its strong workforce, positive outlook for business investment and belief that GDP can continue to grow.

Employment

There is general consensus that the unemployment rate will rise in 2023 as the economy slows.

Deutsche Bank’s gloomy forecast of a recession is based on a prediction of the current unemployment rate of 3.5% rising to 4.5%.

While the RBA also concedes unemployment will eventually rise, it is predicting levels to hold at 3.5% until the middle of the year, reaching 3.75% by the end of it.

It then forecasts a rise to 4.25% by the end of 2024.

Sustaining growth and preventing the unemployment rate from rising will be the RBA’s biggest challenge toward the second half of 2023, once it stops rising the interest rate and is satisfied spending has eased.

Property

After two years of booming returns, property predictably hit the skids in 2022 as soon as interest rates began their journey north.

The correction has still been negligible compared to the enormous appreciation with average prices nationally down 3.2% for the year to November after capital city prices fell by 5.2% according to CoreLogic.

Adelaide house prices have boldly resisted the decline, surging a further 13.4% in 2022 to an average of $649,979, only losing steam in the last couple of months of the year.

A sense that Adelaide properties have been largely undervalued for some time as well as a smaller volume available helped shield the city from the national downturn.

Incredibly, Seacliff Park units climbed 41.4% while Davoren Park house prices jumped 34.7%.

Prices will remain largely susceptible to interest rate fluctuations with further declines expected nationally if rates rise in the early part of 2023, before steadying or even climbing again, should rates fall later in the year.

Markets

As always, this is where it gets tricky.

Inflation continues to negatively affect share prices and this may ease if as expected, it slows in 2023.

World events such as the war in Ukraine and China’s strict COVID policies continue to have an impact on markets although the latter’s slight relaxation is a positive sign towards it opening up.

Volatility is unlikely to dissipate any time soon yet there remains a growing air of confidence after a 7% reverse in the All Ordinaries Index in 2022.

A Bloomberg survey found 71% of fund managers expected global markets to rebound in 2023 by up to 10%.

There is particular optimism for the prospect of Australian shares, boosted by a stronger local economy.

Significantly, only once in the last 40 years has the ASX failed to rebound from a year of decline with it delivering a double-digit return on every other occasion.

The exception was during the years of record interest rates in 1982-83. Investors who held their nerve still cashed in with stocks shooting up 60% in 1984.

In addition, the ASX’s price/earning ratio (P/E) is below the five and 10-year average, making its valuation much more attractive than 12 months ago.

Outlook for investors

Fortunes can be made in turbulent times when opportunities present themselves via undervalued stocks.

But the overriding advice should always be that delivered by Bank of America Vice Chairman Keith Banks who said: “The reality is, it's time in the market, not timing the market.”

Consider your long-term investment strategy and don’t overreact to prevailing economic winds unless your own investment goals have changed.

Markets will always ebb and flow, the key is to stay on course rather than reacting to fear-mongering with knee-jerk reactions.

Get advice today

Whether you are just shaping your investment portfolio and strategy or you are an experienced investor, it is important to build a relationship with an accomplished and trusted financial adviser to guide you towards the opportunities and away from looming mistakes.

Diversification is as important as ever and regular assessments of your portfolio are important to maintain this as economic forces and your own circumstances change.

But with so many investment options and companies to analyse, it’s never easy to get a read.

That’s where Calder Wealth Management comes in.

CWM are financial experts who can help you make the best financial decisions for your long term interests.

There really is no substitute for quality financial advice from someone personally invested in your future.

At CWM, we pride ourselves on leading our clients into the future with structure, financial stability and confidence.

Contact us today to discuss all of your financial needs and concerns.

 Written by Ben Calder

The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.