The Australian economy might experience some economic downtime in 2017, so it’s a good idea to start planning now.
There have been many unexpected political and economic hiccups in 2016. Both Brexit and the US presidential election have had a negative impact on the Australian economy. Economic forecasts for 2017 expect the Australian economy to continue being sluggish. Experts also suggest that 2017 may be a bad time for the property market. It may be wise for you to cut down your spending and lower your debt.
Possibility of a recession?
Economists agree that the Australian economy will experience a downturn in 2017, although there is some debate as to the extent of the slow down.
Steve Keen, head of economics, history and politics at Kingston University in London says that Australia has long avoided a recession by stimulating borrowing and spending in the private sector.Unlike many other countries, Australia has actually increased its debt-to-asset ratio after the global financial crisis (GFC). Keen says this strategy will be unviable in the long run and concludes that a recession is bound to occur in 2017.
Other economists agree that there will be a downturn but deny the possibility of a full-blown recession. Economists have observed that every 7.5 years, the United States experiences an economic contraction, and Australia is no exception. Recessions are a normal component of the economic cycle and Australia has been lucky enough to go many years without one. Even Philip Lowe, chief of the Reserve Bank of Australia (RBA) admits that Australian banks and corporations are now preparing for a period of financial uncertainty.
The real estate bubble is set to burst
Lindsay David, author of Australia: Boom to Bust, is pessimistic about the future of Australian real estate. By drawing insights from property market crashes in similar countries such as Ireland, he predicts that 2017 will be the start of our own $1.9 trillion debt avalanche. Similar to what happened to the Lehman Brothers during the GFC, David believes that the big four banks will be heavily affected and that the only way to save them will be a total government bailout.
Gregory Copley from the International Strategic Studies Association likewise predicts that 2017 will start a new phase of strategic economic development, characterised by a sharp decline in foreign direct investment in real estate.
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Strategies to protect yourself against a recession
Manage your mortgage
Due to the role that the property market will play in an economic downturn, it is crucial for you to control the risk associated with your home loan and reduce your mortgage debt strategically. You may want to increase your repayments and fix a portion of your variable rate loan. You may even want to consider refinancing if you can find a better lender.
Increase your savings and build up your buffer
Now is the best time to increase your savings and strengthen your emergency fund. Recent research by ME Bank states that 51% of Australian households are under saving and RBA chief Phillip Lowe also reveals that the current average household debt is almost double disposable income. Cut back on your spending and put the surplus into an emergency fund. Having an emergency fund never hurts, even if a recession doesn’t end up occurring.
If you struggle with saving, you should treat putting money aside as a priority expense. When you receive your salary, deposit 30% of it (or whatever percentage you decide on) into your savings account before paying off your other expenses. Of course, you will have to decrease your non-essential expenses in order to make this savings commitment. You will be surprised at how much of an impact you can make just by saving a fraction of every pay cheque. Put these savings into a high-interest savings account or even a term deposit and let compound interest do its marvellous trick.
You can determine the appropriate size of your safety cushion by asking yourself how many months you would need to last without an income if you were to lose your job. This may be affected by the nature of your career and how confident you would be in job hunting.
Rates last updated December 29th, 2016
Initial Deposit
$
Monthly Deposit
$
Period
months
Maximum Variable Rate p.a.
Standard Variable Rate p.a.
Bonus Interest p.a.
Fees
Min Bal / Min Deposit
Interest Earned
ME Online Savings Account
Ongoing, variable 3.05% p.a. rate when you link to a ME Everyday Transaction account and make a weekly purchase with your Debit MasterCard using tap & go. Available on balances up to $250,000.
3.05%
1.30%
1.75%
$0
$0 / $0
Open
More
Citibank Online Saver
Introductory rate of 3.00% p.a. for 4 months, reverting to a rate of 1.70% p.a. Available on balances below $500,000.
3.00%
1.70%
1.30%
$0
$0 / $0
Open
More
RaboDirect High Interest Savings Account
Introductory rate of 3.05% p.a. for 4 months, reverting to a rate of 2.00% p.a. Available on balances below $250,000.
3.05%
2.00%
1.05%
$0
$0 / $0
Open
More
Bankwest Hero Saver
Ongoing, variable 2.65% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $250,000.
2.65%
0.01%
2.64%
$0
$0 / $0
Open
More
AMP Saver Account
Introductory rate of 2.55% p.a. for 4 months, reverting to a rate of 2.10% p.a. Available on balances below $5,000,000.
2.55%
2.10%
0.45%
$0
$0 / $0
Open
More
Lower your level of debt
Going into an economic downturn with an unsustainable level of debt is a sure-fire recipe for disaster. Now is the perfect time to re-evaluate your borrowing and work towards paying off your debts. Consider paying off your credit cards and cancelling them, transferring your loans to a more favourable provider, implementing a viable budget and downgrading your car to decrease repayments. Remember, if you’re questioning whether you can afford a credit card or a line of credit, the chances are that you can’t. Start managing your debt early and get ahead of the game.
Minimise risk and maximise liquidity
For the majority of us, a recession will have a devastating impact on our investments. If you have not already done so, you should consider diversifying your investment portfolio immediately. Invest in different companies across different industries, divert your funds away from high-risk tech companies and focus on blue chip stocks. You should also consider defensive or non-cyclical stocks. These are stocks that are not highly dependent on the state of the economy and can still make a profit during an economic downturn such as food or water. This also means assessing any investments you have with businesses whose earnings are negatively impacted by the state of the economy, such as discount and online retailers. It’s also an excellent idea to diversify into international shares and securities.
Rates last updated December 29th, 2016
Description
Standard Brokerage Fee
Monthly Fee
IG Share Trading
Low brokerage fees on Australian and international shares.
$8
$0
Go to site
More
HalifaxOnline
Trade US and Australian shares, options, futures and CFDs with no registration fees. Trade 24/7 on your desktop, tablet or smartphone.
$14.95
$0
Go to site
More
FP Markets Share Trading Account
Trade in ASX Stocks and CFDs, International CFDs, CFD Futures, Forex, Indices and Commodities.
$14.95
$0
Go to site
More
Invest in yourself
It may be worthwhile to consider how your current job may be affected by an economic downturn. Consider updating your skills and taking additional career development courses to safeguard yourself from financial uncertainty. Given the economic uncertainty ahead, investing in yourself may be better than investing in any other asset.
