Navigating the Economic Landscape of 2023 and Outlook for 2024

Insights from Crest Financial Advisor Rhys Higgins

As we approach the conclusion of 2023, Crest Financial Services offers a comprehensive overview of the economic landscape in 2023-2024, featuring key insights from senior financial advisor, Rhys Higgins. Let’s delve into the current state of Australia’s economy and what to expect in the coming year.

In the intricate economic landscape of 2023, Australia encountered various challenges and shifts in key indicators. According to the Reserve Bank of Australia, inflation remains above 5 per cent in year-ended terms, down from its peak at 7.8% in December 2022, however, remaining well above the Reserve Bank of Australia’s target range of 2-3%. Concurrently, GDP growth slowed to 2.1% since September last year, as real consumer demand dwindled from a decline in real household disposable income influenced by higher inflation and increased mortgage interest rates, according to figures released by the Australian Bureau of Statistics (ABS).

A pivotal aspect of the economic narrative in 2023 was the decline in the household saving-to-income ratio from 2.8% to 1.1% (Australian Bureau of Statistics). Financial advisor Rhys Higgins from Crest notes, “The rising cost of living in 2023 has impacted how Australians accumulate money, leading to a reduction in savings. Many Australians have needed to tap into savings accounts to cope with increasing prices.”

In the outlook for 2024, the Reserve Bank of Australia (RBA) foresees persistent economic challenges for Australians. The RBA predicts no real income growth until the end of 2024, and although inflation is expected to remain higher than anticipated, it is projected to subside to within the RBA’s preferred 2-3% range by the following year (2025), which will keep raising the cost of living and impact on Australia’s power to save money, says Rhys Higgins.

Concerning the labor market, the unemployment rate is expected to increase from 3.6% in September to 4.25% by the end of 2024, maintaining this level until at least the end of 2025 (RBA). Additionally, wage increases are showing little evidence of sparking a “price-wages spiral,” with the wage price index expected to ease back to 3.7% by the end of 2024 (RBA Forecasts).

Rhys also underscores the global influences and risks on Australia’s economy. He highlights the impact of the overseas situation on market shares and inflation, noting concerns about the wavering of the Chinese economy, uncertainties caused on the Hamas-Israel dispute and the ongoing war in Ukraine.

As Australia concludes 2023, Rhys anticipates shifts in consumer behaviour for the coming year. Australians may choose to reduce travel, opt for lower-cost products, cut general expenses, and explore additional income sources. This will have an impact on how Australians accumulate wealth over the short to medium term. However, given Australia’s strong Retirement Savings (Super), the escalated savings should continue to grow despite the cashflow pressures; says Rhys.

Despite these challenges, Rhys expresses economic optimism, stating, “At the end of the year, the economy is improving, and Australia maintains a strong economic position compared to other countries. Economists expect better conditions by the end of 2024, and so do we.” This scenario makes the management of assets even more important and emphasizes the significance of professional long-term financial advice, which Crest is well-positioned to provide.

References

Reserve Bank of Australia (RBA) Publications:

• https://www.rba.gov.au/publications/smp/2023/aug/domestic-economic-conditions.html
• https://www.rba.gov.au/publications/smp/2023/nov/overview.html#:~:text=Statement%20on%20Monetary%20Policy%20%E2%80%93%20November%202023Overview,of%202%E2%80%933%20per%20cent.

International Monetary Fund (IMF):

• https://www.imf.org/en/News/Articles/2023/10/31/cs103123-australia-staff-concluding-statement-of-the-2023-article-iv

Australian Bureau of Statistics (ABS):

• https://www.abs.gov.au/media-centre/media-releases/australian-economy-grew-02-cent-september-quarter

ABC News:

• https://www.abc.net.au/news/2023-12-09/tax-hitting-household-savings-more-than-interest-rates/

Australian Industry Group (Ai Group):

• https://www.aigroup.com.au/resourcecentre/research-economics/economics-intelligence/2023/august-australian-economic-forecasts/
• https://www.aigroup.com.au/resourcecentre/research-economics/economics-intelligence/2023/june-global-economic-forecasts/

The Guardian:

• https://www.theguardian.com/australia-news/2023/nov/10/australians-wont-experience-real-income-growth-until-end-of-2024-rba-forecasts#:~:text=%E2%80%9CBecause%20of%20the%20more%20resilient,least%20the%20end%20of%202025

The 2023/24 Federal Budget

The federal budget for 2023 brings good news for various segments of the Australian population including:

• Low and middle-income households: The budget allocates $14.6 billion over four years to provide cost-of-living support to predominantly low to middle-income households.
• Pensioners and single parents: Measures have been implemented to increase support for pensioners and single parents, costing $1.9 billion over five years.
• Medicine users and general practitioners (GPs): An additional $3.5 billion will be allocated to Medicare over five years to enhance access to GPs, lower medicine costs, and provide better healthcare services.
• Aged care workers and recipients: The budget includes a 15% pay rise for aged care workers, amounting to $14.1 billion over four years. This increase in spending aims to improve the quality of aged care services.
• Low-income renters: To address housing affordability, the budget offers subsidies to move from gas to electric appliances, benefiting low-income renters.
• Jobseeker recipients: The budget introduces a modest increase in Jobseeker payments, with additional support for individuals over 55 years of age.
• Small businesses: Small businesses can take advantage of a $20,000 instant asset write-off, stimulating economic growth and investment.
• Build-to-rent sector: Tax changes are implemented to boost build-to-rent housing and improve housing affordability.
• Skilled migrants: The budget allocates measures to support skilled migrants and foster their integration into the workforce.
• Environment: Investments totaling $2 billion are dedicated to the hydrogen industry and incentives for developers to construct environmentally friendly houses, promoting renewable energy and sustainability.
• Employees: From 1 July 2026, employers will be required to pay their employees super at the same time they pay their wages. This will enable employees to track their entitlements to ensure they are being paid on time and in full. Additionally, this will allow for quicker payment of superannuation guarantee payments and a longer period of time to compound.

While the budget brings several positive outcomes, there are also some sectors that face disadvantages.

• Gas producers: Certain measures within the budget impact gas producers, potentially leading to a reduction in their profitability.
• Vapers and smokers: The budget includes a crackdown on vaping and aims to reduce smoking, which may affect those who engage in these activities.
• Some prospective NDIS recipients: The budget introduces measures to slow down the growth of the National Disability Insurance Scheme (NDIS), potentially affecting some prospective recipients.
• Consultants to the public sector: The budget may impact consultants working with the public sector, potentially leading to changes in their roles or demand for their services.
• High balance super members: The budget introduces a 30% tax on superannuation fund earnings for balances exceeding $3 million. The 30% tax will only apply on the balance over $3million and not the entire balance. This will apply from 1 July 2025.

Inflation and its impact upon the economy

Inflation is something you may have heard a lot about in the news over the past couple of months, but what is it exactly? To put it simply, inflation is a rise in the prices of goods and services over time. When this rise outpaces the growth of wages, the purchasing power of our money falls, leading to an increase in our cost of living.

Inflation is directly related to supply and demand in the economy. For example, the recent conflict in Ukraine and the decision to ban Russian oil exports to other countries has led to a reduction in the amount of oil available for purchase, however the demand for oil has remained steady, causing an increase in oil prices around the world. This impact can be clearly seen in Australia through the increase in petrol prices this year.

Another example of inflation that has been seen in Australia in recent years has been the dramatic increase in housing prices. A lack of housing supply combined with record low interest rates allowing increased access to capital has created a volatile mix where demand for housing has been increasing whilst supply has remained relatively low. This has caused a surge in housing prices, making it extremely difficult for new buyers to get into the market. However, as discussed below, The Reserve Bank of Australia (RBA) is able to take measures to address issues caused by inflation.

It is important to note that although inflation may be having a negative impact upon our bottom line, it has also led to an increase in the cash rate as the RBA attempts to bring inflation under control. By raising the cash rate and interest rates, the RBA is able to limit the amount of funds being borrowed, reducing public cash flow and spending. By reducing spending, the RBA hopes to be able to ease the level of inflation and bring the rate of inflation back in line with current wage growth and expectations.

This increase to the cash rate has already seen an increase in the return on cash and fixed-interest investments such as term deposits, which is great news for those with a more conservative investment approach.

If you have any concerns about the impact of inflation on yourself or your investments, please do not hesitate to contact one of our knowledgeable financial advisers here at Crest Financial Services.

If you would like to learn more about the history of Inflation, Doctor Shane Oliver, Chief Economist at AMP Capital, does an extensive in-depth analysis into the impacts of inflation in the 1970’s and 80’s through his weekly podcast “Simplifying Investing”.

2022-23 Federal Budget

Despite a backdrop of the ongoing Covid 19 pandemic, the war in Europe, and a looming Australian federal election, the 2022-23 Federal Budget held few big surprises.  Most of the announcements related to tax relief and providing a post-pandemic economic recovery via stimulus payments.

It is important to remember that these are yet to be legislated, although we expect most of them to be accepted by the parliament. Please contact us if you have any questions or would like to know how any of these announcements may impact your personal situation.

The following provides a basic summary of some of the announcements made:

Superannuation

Temporarily extending the minimum pension drawdown relief
Proposed effective date: 1 July 2022

The temporary reduction to the minimum income drawdown requirement for superannuation pensions will be further extended until 30 June 2023. This will allow people to minimise the need to sell down assets given ongoing market volatility. It applies to account-based, transition to retirement, and term-allocated superannuation pensions.

Tax

Temporarily cutting fuel excise
Proposed effective date: 30 March 2022

Fuel excise will temporarily be cut by half, or 22.1 cents per litre, to save families an estimated $30 a week.

Increasing the Low and Middle-Income Tax Offset (LMITO)
Proposed effective date: 1 July 2021

The LMITO will be increased to up to $1,500 for the 2021-22 financial year. All eligible LMITO recipients will benefit from the full $420 increase, referred to as the Cost of Living Tax Offset.  The benefit is based on your taxable income as follows:

• Below $37,000 will be $675 (currently $255).
• Between $37,000 and $48,000, the offset will increase at the rate of 7.5 cents per $1 above $37,000 to a maximum of $1,500 (currently $1,080).
• Between $48,000 and $90,000 are eligible for the maximum LMITO benefit of $1,500 (currently $1,080).
• Between $90,000 and $126,000 the offset phases out at a rate of 3 cents per $1.
• Above $126,000 it is not available

Increasing the Medicare levy low-income thresholds
Proposed effective date: 1 July 2021

Low-income taxpayers will generally continue to be exempt from paying the Medicare levy. The threshold for:

• Singles will be increased to $23,365
• Families will be increased to $39,402
• Single seniors and pensioners will be increased to $36,925
• Families (seniors and pensioners) will be increased to $51,401.

Social security & Aged Care

Introducing a one-off cost of living payment
Proposed effective date: 28 April 2022 onwards

A one-off tax-free payment of $250 to Australians who receive qualifying social security payments or hold eligible concession cards, including:

• Age Pension
• Disability Support Pension
• Carer Payment
• Carer Allowance Jobseeker Payment
• Pensioner Concession Cardholders
• Commonwealth Seniors Health Card holders.

Enhancing the Paid Parental Leave scheme
Proposed effective date: 1 July 2023

The Government plans to create a single scheme of up to 20 weeks, fully flexible and shareable for working parents within two years of their child’s birth or adoption. Single parents will also benefit from the extended 20-week entitlement. The income test will also be broadened. Parents who don’t meet the individual income threshold (currently $151,350) can still qualify for payment if they meet a family income threshold of $350,000 a year.

Lowering the Pharmaceutical Benefits Scheme (PBS) threshold
Effective date: 1 July 2022

The Government will reduce the PBS safety net thresholds to support people who have a high demand for prescription medicines due to their health needs. This means approximately 12 fewer scripts for concessional patients and 2 fewer scripts for general patients a year.

Housing affordability

Expanding the Home Guarantee Scheme
Proposed effective date: 1 July 2022 or 1 October 2022 depending on the specific scheme

The Home Guarantee Scheme allows first home buyers to build or purchase a newly built home with a low deposit, replacing the need for commercial lenders’ mortgage insurance.

The Government is expanding the scheme to make available:

• 35,000 guarantees each year (up from the current 10,000) from 1 July 2022 under the First Home Guarantee, to support eligible first home buyers to build or purchase a newly built home with a deposit as low as 5%.
• 10,000 guarantees each year from 1 October 2022 to 30 June 2025 under a new Regional Home Guarantee, to support eligible homebuyers (including non-first home buyers and permanent residents), to purchase or construct a new home in regional areas with a deposit as low as 5%.
• 5,000 guarantees each year from 1 July 2022 to 30 June 2025 to expand the Family Home Guarantee. This program enables eligible single parents with dependants to enter or re-enter the housing market with a deposit as little as 2%.

Reduction in Allocated Pension Drawdowns have been Extended!

Originally, this reduction only applied to the 2019/20 and 2020/21 financial years and was designed to help reduce the impact on allocated pension accounts during the economic downturn.

For example, a person aged 65-74 must withdraw 5% of their allocated pension balance throughout a financial year. Given the reduction, the new minimum withdrawal amount is 2.5% of the balance.

As always, if you have any questions or want to know how this relates to your personal situation, please do not hesitate to contact the Crest team on 02 4929 2552.

The long-term impacts of COVID-19 on the Australian economy

As Australia continues to weather the COVID storm, it’s easy to only focus on the present. While we remain in the first phases of economic shock, it’s fair to say that the effects of COVID-19 will be widespread and felt for a long time to come.

Workforce and industry

COVID-19 has had a heavy impact on Australia’s employment landscape. Recent figures indicate a 7.4% unemployment rate, and while job losses are hitting families hard in the short-term, these workforce shifts are also shaping how industry and employment will look in the future. Certain sectors, like aviation and tourism, might never be the same again. Increasingly, organisations are being forced to make structural changes – operations are being moved online, and businesses are automating processes typically performed by humans. Now that these difficult changes have been made, it’s likely some of them will become permanent even after COVID. This is particularly true in the hardest-hit sectors of hospitality and retail, where businesses will need to transform to survive, changing the landscape of these industries for the long-term.

Globalisation, trade and population growth

Short-term travel restrictions and disruption to the global supply chain have driven governments around the world to reassess their stance on globalisation. Production of some goods will be moved onshore, particularly those that are deemed of national significance like healthcare products, and there will be more slack built into supply chains to account for reduced reliability. Most significantly, Australia will feel the impact of a vast reduction in migration, with the Prime Minister estimating that 34,000 migrants will arrive in the country in the year to come – a staggering drop from the 533,500 who arrived in 2019. A lack of migrants over the longer-term will result in population decline and a reduced workforce that could have an enduring economic impact on the healthcare, tourism, housing, and agricultural sectors.

Education and skills

The pandemic will have a lasting effect on a generation of learners. International students aren’t arriving, domestic students are learning over Zoom and tertiary institutions are losing money and staff at a rapid rate. A crisis in higher education could have long-term impacts on the structure of the sector and some institutions may not survive. But it isn’t all necessarily bad news. Rapid, innovative training courses could begin to take the place of the traditional Bachelor’s degree, as school-leavers get the skills they need to enter a fast-evolving workforce and keep Australia competitive in key industry sectors.

Australia is going through a difficult time, but it’s important that we keep our attention focused on long-term growth and recovery. If you’d like to discuss how best to set yourself up for the future, please don’t hesitate to get in touch.

The Reserve Bank of Australia decreased interest rates to record all-time low

At the November meeting, The Reserve Bank of Australia decreased the interest rates to a record all-time low of 0.1%, dropping even further than the previous low of 0.25%. The Reserve Bank has reduced rates to assist in addressing the high rate of unemployment by providing relief (in the form of reduced funding costs) to the economy. While there is still a lot of economic uncertainty, as we work through the changing economic environment created by the pandemic, the Reserve Bank has looked to support the economy with the recent rate drop.

The stark reality of this drop is whether these rates will be passed on by the banks.

At this stage, most banks are keeping quiet on whether they will pass on the interest rate, but many experts are encouraging the banks to follow the Reserve Bank’s lead and pass it onto their customers. If passed on by the banks the monthly repayments on mortgages will reduce.

For example:

A mortgage of $200,000 ($500,000) the monthly repayments will drop approximately $16 ($40) per month. While this reduction will assist people with their mortgage, for others it is a further decline to savings income.

If you have a mortgage and haven’t had it reviewed recently, now would be a good time to consider your options. Talk a Crest Mortgage adviser today.

Additionally, if you have cash deposits and want to consider your options to potentially increase returns, speak to one of our advisers today.

Drought – What it means for the Australian Economy

More recently, much of eastern Australia has been experiencing prolonged dry conditions and, over the winter months, unusually high temperatures.

The most obvious economic impact of a drought is on the volume of agricultural production, particularly of crops, which typically fall sharply during a drought, and then rebound strongly after the drought has broken. The impact on livestock products (such as meat and dairy) is a little more complicated. Once drought conditions have become established, livestock producers will seek to reduce their herds or flocks, resulting in a temporary increase in the recorded volume of meat production – similar to what we are witnessing at present. When the drought breaks, recorded meat production typically falls as graziers focus on rebuilding their herds. We are yet to see this flow-on effect.

The more recent droughts have seen a smaller decline in agricultural output than those of earlier decades. That’s because they have tended to be more regionally concentrated than those of the 1960s, ’80s and ’90s. Thus the current drought has been concentrated in Queensland and New South Wales, whereas Western Australia, which in recent years has accounted for a larger share of Australia’s crop production, has been experiencing more normal weather conditions.

Farmers are typically better prepared for drought than in earlier decades. This is partly because of better weather forecasting, greater use of irrigation and smarter crop rotation and herd management. Farmers have also been able to make use of financial tools, such as farm management deposits, to “smooth” weather-induced fluctuations in their income.

Despite these broad economic improvements (compared to previous droughts), many of the flow-on effects are hurting both farmers and their rural communities. In an effort to support local businesses many regional towns have focused on diversifying their economies through tourism. Attracting visitor numbers from larger cities injects much-needed money into these communities, providing employment opportunities and a boost in morale for those doing it tough.

Although there is no foreseeable end to the current drought, there are signs, particularly in Southern NSW of some rain. However, it will take a number of seasons for the necessary benefits to economic and social recovery for these areas to be felt.

Welcome to the new Financial Year!

Tax season is well and truly in full swing at Crest Accounting! With this in mind, it is time to organise those end of year records so that we can complete your 2018 Income Tax Return.

There have been some changes to legislation over the past 12 months that may impact you, and your ability to claim certain deductions. Here is a quick summary of some of the changes we think may be important to you:

Personal Super Contributions

For the year ended 30 June 2018 and onwards, the ability to claim a tax deduction for personal contributions you make to your super fund has been extended to everyone (as opposed to only those who were self-employed). There are still some limitations, including contribution caps and age restrictions, however the average person will now be able to contribute to super at their will, and claim a tax deduction for these amounts. As with anything, there is some paperwork to be completed in order to claim a deduction, but your financial adviser or accountant will be able to guide you with this. It is best to act as quickly as some events within your super fund may impose restrictions on how much you can claim. It would also be beneficial to have a chat with us as to whether this is something you should look at in the future.

Travel for Work

There have been some recent changes (for the better) in regards to the situations in which you can claim a tax deduction for travel related to your work. One noteworthy change is the introduction of the deductibility of “co-existing work locations travel”. In most situations this will eventuate where an employee is required to work in more than one location, and travel to the secondary location will now be deductible. Employees are still restricted to either the cents per kilometre method (up to 5,000km), or the log book method, and careful consideration needs to be given to whether these rules apply and if you are eligible.

Rental Property Changes

from 1 July 2017, some new restrictions have been placed on the deductibility of travel and depreciation expenses in relation to rental properties. Travel expenses in relation to residential rental properties are no longer deductible, regardless of when the property was acquired. In prior years a person has been able to claim expenses over the year for when they travelled to the property to inspect it, this is no longer the case. Additionally, any depreciating assets acquired (whether as part of a property or separately) after 9 May 2017 where the assets have been “previously used” (second hand or acquired with a property that was not new) are no longer able to have their depreciation claimed as a tax deduction. These rules can become quite complex when trying to separate assets into deductible and not, so it is best to speak to one of our accountants here at Crest to determine the best approach moving forward.

At Crest, our focus is to ensure your tax return remains compliant, whilst working hard to ensure the best tax position for you, your family and your business.

Call our office on (02) 4933 3466 to book an appointment today.

First Aid Training at St. Johns Ambulance Training Centre

Recently, three of our staff members passed their First Aid Training Course at the St. Johns Ambulance Training Centre in Adamstown.