Yahoo Finance Aussie economy: Here's what went wrong
In June, the Reserve Bank broke the interest rate change drought, and dropped the cash rate to 1.25 per cent.
The RBA followed that up by another 0.25 percentage point rate cut in July.
Why?
The economy needs help.
Well not the whole economy, just the private sector.
Let’s look at what’s gone wrong and why it throws up a whole bunch of opportunities to make money.
Why are interest rates so low?
The data is all pretty clear, the private sector has ground to a halt.
Despite an ‘official’ cash rate under 2 per cent earlier this year, the economy was slowing.
So, the Reserve Bank lowered the cash rate further to arrest this slowdown, and perhaps drive more growth.
However, bosses out there still aren’t keen to hire workers.
The Reserve Bank thinks by making borrowing easier, businesses will invest and grow, and then there will be a need to hire.
Those newly appointed workers are then expected to spend up in the stores.
Another reason for lowering interest rates is to make mortgage repayments smaller.
Most households budget for their mortgage repayments, so if those repayments are unexpectedly lower it means consumers will have more cash in their pockets to, again, spend at the stores.
Why they’ll be low for a generation
There are two problems.
Businesses in the private sector aren’t hiring anytime soon.
Strange, isn’t it?
The share market is booming, and pushing all-time highs, and yet hiring in the private sector has fallen off a cliff.
There’s no doubting firms’ profitability, but firms are not spending extra cash on wage growth and new hires.
Meanwhile, households are still ‘deleveraging’.
That’s a fancy word for paying off debt.
Not that long ago Australians had one of the highest levels of debt per household in the world.
Not a bad claim to fame.
The problem then though is that when the banks make paying off a loan a little easier, most people try to pay off their loan quicker, rather than spending the extra cash.
That doesn’t help the economy and suggest interest rates will have to go lower still.
And, of course, the property market is still vulnerable.
The health of the property market is directly linked to the amount of borrowing in the economy, and the amount of borrowing is directly linked to interest rates.
So… so long as the property market walks the tight-rope between rising and falling, as it’s currently doing, interest rates are set to stay very “supportive” of the property market.
I can’t see interest rates going up. Well, actually, frankly, I can’t see them going up for years and years, a generation even.
How it affects the way you should think about your money
Let’s face it, you’re not going to earn any money in the bank by putting your cash in a deposit.
You might make some money over the long haul by putting money in the highest interest earning term deposit you can find, but it’s going to be a long time before you see a decent return.
Right now, UBank’s USaver, with Ultra bonus interest rate, is offering 2.41 per cent with a minimum deposit of $200.
But you need to read the fine print.
To get the bonus variable interest rate, you must deposit at least $200 a month into your USaver Ultra transaction or USaver savings account from a non-UBank account, and the total balance across all of your USaver and USaver Ultra accounts, including joint accounts, must not exceed $200,000.
The share market is another option.
The benchmark index, the ASX200, is close to the highest it’s ever been.
That’s because corporate Australia is in rude health. “Business conditions” may be lousy, but solid companies are still churning out big profits – especially the big banks and miners.
Analysts I’ve spoken to say the share market is due for a pretty nasty correction, but, after that, it’s got the ingredients to keep pushing higher.
You can either buy good, solid companies now, and ride it out, or wait for the market to dip, and buy more aggressive ‘growth’ stocks later. It’s entirely dependent on how much risk you’re prepared to live with.
And speaking of risk… margin lending is another option for those with a good ticker (heart).
Margin lending involves borrowing cash to buy shares. If the governor of the Reserve Bank says it’s never been a better time to borrow, hey, why not borrow to buy shares?
If the market moves in your favour, you’ll make a lot of money fast. If it moves against you, be prepared to stump up a lot of cash quickly.
Let’s not forget property.
The market appears to have stabilised so if you’ve been waiting to get into the market, and you’ve got the nerve, now is probably not a bad time to consider that investment property.
Lending standards are more relaxed now than they have been in recent years.
You’ll need nerves of steel though - the market’s not exactly been behaving itself of late.
Fixed or variable home loan?
When borrowing, a big question investors, and aspiring home owners face is whether or not to take out a fixed or variable loan.
The answer now is simple.
You can’t really go wrong whichever one you choose because interest rates will be low for a long period of time.
What I would say, however, is that you can break up your loan with both a fixed and variable portion.
With that in mind, one idea might be to make the variable portion the larger of the two.
That way if interest rates fall, you’ll be able to negotiate a lower rate on a significant chunk of the loan… while still having some peace of mind with a portion of the loan remaining fixed.
Final thoughts
While your re-jigging your finances, why not take a look at your super.
Ask yourself, is it growing, and, if it’s not, why not?
If you’re young, is enough money invested in good growth shares? And if you’re heading towards retirement, and given there are warnings about a stock market correction, does your super portfolio have some balance to it – like bonds and cash?
Many Australians are eligible for a tax offset of $1,080.
All you have to do is file your tax return. If that’s too much trouble, find an agent to do it for you.
There’s money to be made out there. There are no easy options, but getting it right is half the fun.
@DaveTaylorNews
