Navigating a changing economic environment

Understanding where the economy is headed next is key to understanding how to best manage your saving, spending and borrowing – and successfully navigating the months ahead.

When the Australian economy reliably records growth year-on-year, it can be easy to forget how important its health and strength is to day-to-day life. Though the Australian economy is faring relatively well compared to others globally, the COVID-19 pandemic stopped a nearly 30-year run of economic growth. Its aftershocks are being felt now in the form of higher interest rates, a falling property market, and rising inflation. 

These three things are important to your financial position, and we explain why and how they are set to evolve in the coming months.

1. Interest rates are expected to keep rising

Prior to the pandemic, interest rates had been falling since 2011 in Australia. They were taken to historic lows when the pandemic first hit, triggered by emergency measures from the Reserve Bank of Australia, which were designed to keep the cost of borrowing low and the economy ticking during a disruptive time.

Those measures were only ever temporary, and now as we emerge from the pandemic, they’re being unwound – as a result, interest rates are on the rise. Increased interest rates also help curb inflation, which is currently on a steep rise in Australia and the rest of the world. 

“It’s natural to expect that a lot of people will feel anxious about a rising rate environment. After all it has been many years since interest rates have consistently gone up. But we should remember that this is a natural part of the economic cycle, and there are things borrowers can do to help them feel more in control of their finances and make smart choices about the future,” says Carrie Fox, Head of Home Lending at Macquarie Bank.  

In this environment, you could ask yourself if your home loan and bank accounts suit your budgeting and lifestyle needs.  

Offset accounts, for example, are one way to help you reduce the interest you pay on a home loan, just by holding your savings in them. You can also use offsets for your everyday spending.

Also, if you’re in a position to, you could consider making additional repayments ahead of further rate rises. 

The silver lining for savers

On the upside, Australians now have access to higher interest rates on their cash accounts. So, if you have a savings pool, or you’re looking to build one, it might be a good time to consider what your banking set-up is, and if it’s as effective as it could be.  

Olivia McArdle, Head of Payments and Deposits at Macquarie Bank, believes savers can find opportunities to make their cash work harder in this environment, but should be conscious of what they’re signing up to. 

“I think savers are feeling more optimistic, it’s been a long time in a very low rate environment. Now, they’ve got something to look forward to,” McArdle says. 

“You should think about if you’ll be able to meet the deposit conditions on higher-interest accounts, will you remember them, and are you happy to commit to – for example – locking away your funds for a set period of time? In other words, what’s your appetite for complexity, what are the needs you have for accessing your money, and what is the return you can achieve? Consider those three things together.” 

2. The property market has shifted gears

After a strong run of growth, particularly in Sydney and Melbourne, the Australian residential property market has started experiencing price declines. 

As the market moves into a downward cycle, it’s important to be prepared, but not panic. Price cycles are historically part and parcel of the Australian property market, and by nature, they have peaks and troughs. Though it can be stressful to own or be selling a property during a down market, keeping an eye on the long-term is key to managing these conditions. 

If you’re actively buying in these conditions, there are a range of professionals you could have in your corner. It’s particularly important to understand how valuations typically work with Australian lenders, so you’re not caught out offering a price tag that a lender deems too high in a changing market. 

3. Cost of living increases are likely to continue

Broadly speaking, ‘inflation’ refers to an increase in the price of goods and services, and is measured as a rate of change over a period of time¹. So, when inflation is high, the impact is a noticeable change in the cost of living, which is what we are currently experiencing. In Australia, there is likely to be more cost pressure to come in the coming months before it stabilises. 

In this environment, monitoring your finances - your incomings and outgoings - is key to managing your costs. 

“The first step for borrowers is to know their financial position to help put them in control,” says Fox. “There is a sense of confidence and comfort in knowing what your options are, and how you can use them to navigate a changing environment.”

You can make use of budgeting tools, bucketing strategies and mobile or online banking to ensure you’re monitoring and managing the rising cost of living as best you can.   

“I’m a big fan of tracking and bucketing, it helps you keep in tune with your savings. Also, there are some good offers out there that can make your savings really just work harder,” McArdle says. 

McArdle also points to the potential benefits of having all your banking in one spot, to help ensure all your funds are visible to you – and being put to work. 

“It’s good to ensure you’re getting a great rate on a transaction account, for example, then to really make the most of it you’d want to check that you don’t have funds sitting idle elsewhere, when they could be working harder.” 

Keep your goals in sight

Changes in the economic landscape, especially those that impact your household budget, can be a challenge to absorb. While there are some unknowns in this kind of environment, history tells us there is at least one certainty – that periods of instability don’t last forever. Keeping your focus on the long-term, and taking a proactive approach to managing your commitments in the meantime, can help you successfully navigate the road ahead. 

¹ https://www.rba.gov.au/education/resources/explainers/inflation-and-its-measurement.html

This article has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (‘Macquarie’). It doesn’t take into account your objectives, financial situation or needs, nor is it intended as a substitute for any accounting, tax or other professional advice, consultation or service – please consider whether it’s right for you. Nothing in this article shall be construed as a solicitation to buy or sell any financial product, or to engage in or refrain from engaging in any transaction. 

The information is current as at July 2022. No representation or warranty, express or implied, is made regarding future performance. Examples are included for illustrative purposes only. Actual performance may depend on numerous factors, including changes in economic conditions and tax legislation.

Any opinions expressed in this article are subject to change without notice. Macquarie accepts no obligation to correct or update the information or opinions in it. No member of Macquarie accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of such information.