Jazoodle’s Economic Outlook
Economic Outlook – Australia
Australia is the lucky country as it has been over 28 years since the last official recession. The economic outlook from the RBA continues to be bullish, but with some potential clouds on the horizon.
GDP will rise to around 3.25%, and then 3.5% in 2018/19 with a slight decline through 2020. The rise stems from natural gas expansion and strong infrastructure building in both the public and private sectors. However, this will reduce as we go through 2018 and into 2019. Unemployment will fall to around and steadying at 5.25%. As the RBA maintains, this will leave some capacity in the labour force, meaning little inflationary pressure from wage growth. On the face of it, the outlook for Australia bodes well – certainly for the next 12 months.
Inflation and Interest Rates
These forecasts are also based on assumptions that interest rates and the price of oil will remain static. Thus, there is little evidence of inflationary pressures growing. There is excess capacity in both the labour market and little input cost pressures, however, oil prices may trump this. There will be some potential respite for home buyers, as house price inflation could reduce. So, with few inflationary pressures building, this means that historically low interest rates will remain. This does bode well for the foreseeable future.
Household Debt and Shocks
However, the forecast does not also take into account pressures on personal finances and household debt, which according to many (see here for instance), are building to historically unsustainable levels. We also know that recessionary pressures build not just by gradual change, but also the result of economic shocks. Business advisors must be wary of potential shocks in the economy and their effects on client business performance. Potential shock events will include things such as:
- Local, regional or global conflicts
- The holders of resources restricting supply, i.e. OPEC oil producers
- Personal debt crises and restricting household demand
- Major economic bloc uncertainty – i.e. the failing of trade deals
- Political uncertainty
Whilst the economic outlook looks good in theory, potential shocks may just be around the corner. Personal debt levels and lack of resiliency in households being of particular concern. This being so, how resilient are your client’s businesses to these shocks? Do you know what a 15% reduction in revenues would mean to your client? Given that labour, being largely a fixed cost, is not easy to reduce or tighten quickly. You can model this and other scenarios with Jazoodle’s forecasting tool. Take the above example as an illustration:
A Case Study
An ASX listed company made $237,000 net profit in the last financial year, on revenues of $54 million. Their cash position at the end of the financial year was $937,000. Assume revenues fall by 15% this coming year. This would mean a turnaround in EBITDA from $1.2 million positive to $1.2 million negative. Cash would also reduce at year end to -$1.1 million negative. This represents a $2 million drop in cash assuming current debtor collection periods are maintained.
What advice should you be giving your client to build up their resilience should such a shock occur? Imagine this scenario. If cash dropped to these levels at the same time credit providers are tightening their facilities, this equals mortal danger. Now may be the time to work with your clients in building their resilience. Building resilience by creating debt facilities or restructure existing funding.
Economic Outlook – United Kingdom
The UK economy has been running at a subdued level since the Brexit vote of 2016. The GDP outlook for the next 12 months will be between 1.5 and 1.6%. With inflation being above the Government’s long-term target, caution should be displayed. If remaining stubborn, this inflation could subdue household spending, further pressurising GDP growth – according to PWC. The result of Brexit negotiations could also mean some divergence form this forecast. It is noted that other global or local shocks will have the effect of dampening demand. The OCED however, believe that inflation will peak in the UK in early 2018, and reduce slightly over the remainder of 2018 and 2019. Alternatively, PWC warns that companies should assess their resilience. They should make contingency plans if any of the potential economic or political shocks eventuate. These shocks have often been the start of recession in many countries.
Should hard Brexit result then companies and their advisors should be assessing company resilience. They should be working on measures with which to increase shock resiliency within their clientbase.
Economic Outlook – New Zealand
If ever there was a divergence between business confidence, and economic outlook, we are currently witnessing this in New Zealand. On the one hand, the ANZ Bank’s quarterly business confidence survey reports that consumer confidence in New Zealand is sitting stubbornly low, and has been for the past 8 months or so. Indeed, in March, the index reduced a further 4 points. The survey reported at profit, export and ease of credit expectations all fell in the first quarter of 2018. Conversely, the NZ Government are forecasting steady growth over the next 4 years of around 3% p.a. as illustrated.
The unemployment rate will remain consistently low, before falling again slightly in 2019. However, this will start to build wage inflation pressures during Q2 2019. This in turn will impact GDP during 2020 as inflation starts to impact spending intentions. It is difficult to see why there is such a divergence in business sentiment versus the outlook of the government. The ANZ report does point to a sharp and sudden downturn in the construction and retail sectors. This could have both a real and perceived effect on actual indicators not yet showing up on government indicators.
Your clients may be planning for expansion, or solidifying existing outputs. They may be looking to building some resilience into their operations and finances. Whatever their objectives, Jazoodle’s forecasting application quickly eases the pain of building multiple scenarios for each of your clients.