When people look into the crystal ball of what is in store for 2023 the spectre of more interest rate rises looms large – but that is only part of the story.
In fact, while many are predicting that the economy will continue to slow down next year some aspects of the slowdown could be to your advantage, depending on how you are positioned.
For a start, it is a fair bet that the Reserve Bank will raise interest rates once or at least twice in the first part of 2025. Assuming that they will hike by 0.25% each time that will take the RBA cash rate to 3.6% and likely push mortgage rates into the 7% range.
So that will be tough for homebuyers and anyone who is falling off the so-called “fixed interest rate cliff” and going back onto a variable rate. It might add up to another $1000 per month in mortgage fees on a mortgage of $600,000.
That’s the downside. One positive is that all the pain might have a payoff in lower inflation. Inflation fell to 6.9% last month and the higher rates are likely to start biting and push it down lower next year.
Some of the supply chain issues in the economy might ease, fuel prices may have peaked and if the Albanese Government can deliver on lower – or minimal increases in – energy prices then that will be another positive.
Wages are also likely to increase, if only slowly. They are going up by around 3.1% at the moment and while that is not enough to catch inflation the gap might close in 2023, so the cost of living pressures might not be so acute.
Unemployment is at a decades low 3.4% and while it might drift higher no-one is yet forecasting a recession in Australia, defined as two quarter of negative economic growth.
The upside to higher interest rates is likely to be a continued fall in property prices, so while it will cost more to borrow it will cost less to buy.
On the stockmarket, the ASX 200 has finished up 2022 pretty much where it began the year, which is a good result considering the volatility.
Returns for most superannuation funds had a rocky start to the year but could – on average – end in positive territory, helped by a bounce of around 3% in October. That might reassure some of us who are doing it tough, but know that at least our retirement savings are not going backwards.
If you don’t like the stockmarket then you’ll be able to get a better interest rate on your savings deposits if you have some. The banks are notorious for setting the rates they lend at much higher than savings rates, but at least deposit rates have lifted off from close to zero which is where they’ve been for the last couple of years.
All up, it’s a mixed picture. If you have a good deposit and are looking to buy a house, or are looking for a decent interest rate for your savings then you’ll be on the right side of the economy next year. You might even be able to land a new job, at higher pay.
For the rest of us, the decidedly unsexy way forward is just to pay down as much debt as we can.
If the cost of money is going up and asset values are coming down then you don’t want to have bigger debt on a declining asset, and you don’t want to be paying any more interest on the same amount of debt.
So, let’s welcome 2023 with clear eyed financial conviction. Let’s hope we can all make it through, richer and more prosperous despite all the volatility.