What might the next financial year hold for Australian companies managing risk? By Corpay
By Peter Dragicevich (pictured), Currency Strategist for the APAC market, Corpay Cross-Border Solutions.
Businesses have had to navigate a difficult backdrop over the past few years. Unfortunately, it is unlikely that the turbulence will die down or that the environment will become easier over 2023/24.
To bring down rampant inflation, global central banks have tightened policy aggressively over the past year. So far this cycle, the Reserve Bank of Australia has raised interest rates by 375bps. This is the fastest and largest RBA hiking cycle in several decades. The moves are intended to curb activity across the economy with the aim of realigning supply and demand to lower inflation.
Will it work? When it comes to inflation, time will tell. However, what is assured is that such forceful steps will produce a significant economic hit. Importantly, it should be remembered that monetary policy changes work with ‘long and variable’ lags, hence the negative impacts are only just now starting to bubble to the surface. Studies by central banks show that rate changes take ~12-18 months to have their full effect.
Based on the scale of the interest rate increases that have occurred, and the policy lags, the chances of a global recession occurring over 2023/24 look to be quite high, in our opinion. Locally, we think growth could slow substantially over the next few quarters as the global downturn unfolds, tighter credit conditions gain traction, and the squeeze on the indebted household sector intensifies, particularly as the large amount of COVID-era fixed rate loans are refinanced at far higher rates. We believe an extended period of subpar growth is in the pipeline. Over time, weaker activity and concerns about the outlook should flow through to the labour market, with unemployment expected to lift.
While softer macroeconomic conditions are meant to slow inflation, this can take time to play out. For businesses, the timing mismatch between the shifts in demand and supply can be problematic. For instance, at the time demand and revenues are starting to fall, costs may still be quite elevated. The labour market is a lagging indicator. Current conditions in the labour market illustrate how the economy was tracking ~6-months earlier. Consequently, prior tightness in labour market conditions may continue to flow through to a business’s wage costs for a while, even if the economic landscape is beginning to deteriorate. High wages would also be compounded by other cost pressures such as rents and/or utilities.
On top of the possible direct impacts discussed above, businesses could also be facing other second order effects which are tricky to plan for. From a broader macro perspective, we would note that previous rapid rate hike cycles and a worsening economic environment have repeatedly exposed flaws and excesses that have accrued across the system. We doubt this time will be any different. However, zeroing in on where and when these issues could flare up is difficult. This means that financial market volatility could, on average, be higher than what many have become accustomed to. This in turn could make investment and hedging decisions hard to implement.