What is the real impact of the changing world economy on home loans and interest rates?
The following summary might help you to understand:
Money Matters
World financial markets experienced a turbulent 2008, with share-markets falling dramatically and governments responding with unprecedented rescue plans.
What’s the cause and impact of the recent volatility of the Australian dollar?
The high demand for commodities, particularly by China, and higher interest rates in Australia saw the Australian dollar rise against most major currencies over the past few years. However the slowing in economic activity brought about by the US sub-prime mortgage crisis has seen the demand for commodities come to an abrupt halt and their prices fall accordingly. This caused the Australian dollar to fall from a high of over US$0.98 to US$0.60 in the space of about four months.
The fall in the Australian dollar will tend to redistribute Australia’s growth over the next year. Exports will be cheaper and imports more expensive. Companies that import items from overseas may see costs rise and may see a consequent fall in profits.
How will the drop in oil price affect consumers and economies?
During 2008, we witnessed oil prices reaching a peak before falling to a four year low in December. This fall in oil prices should assist in boosting economic activity, as the cost to a consumer of filling up the car and the cost to industry for its energy requirements will be lower. This is a positive outcome of the global slowdown.
The Australian housing market?
The value of total lending is down 23.7% year-on-year, compared to its weakest point of -30.4% in June. It would seem that we have passed the lowest point for the short term and lower interest rates will lend considerable support to the housing market. Despite the lower interest rates, activity should remain subdued in the first half of 2009 as unemployment is expected to rise further from here.
What is the outlook for the share-markets?
Some of the conditions for global recovery are falling into place including declining interest rates, the lower oil price, a decreasing rate of inflation and increased government spending. Other data is yet to signal that a bottom has been reached, the most important being the rate of decline in US house prices and freeing up of the frozen credit markets.
Over the course of 2009, government policy action should begin to work, paving the way for a modest economic recovery at the tail end of 2009 and into 2010. The share-market should begin to react to the improved data in advance of the turn in the economy. The continued high uncertainty may see a modest recovery in share prices around mid year. It is likely that risk-taking will be modest as the repair of company balance sheets will be paramount.
What is the key message for investors concerned about their investments?
Share-markets across the world have fallen to reflect a great deal of economic weakness. During this period, companies across the board have felt the effects of negative market sentiment and have suffered dramatic falls to their stock prices. This may provide a good buying opportunity as many investors are now beginning to see there are quality companies with strong balance sheets that are positioned to take advantage of growth opportunities when the economy commences its recovery.
However, before you consider changing your investment, you should seek financial advice. Having a financial adviser and a long-term financial plan can give you the confidence to manage the effects of market cycles. With the right advice you can seek to have your investments tailored to your risk profile and time horizon, allowing you to plan what’s right for you.
