As we start 2016, it's a perfect time to look at what is likely to affect business over the next year. Let's start with big picture issues and then look at what these will mean on the ground.
Three of the most important macro issues that will show across 2016 are:
* The global recovery * Inflation versus deflation * Slowing Chinese growth
The global and US "recovery" is the big one. It's a tenuous recovery but it (or the general perception of it) has has been sufficient to get the US Fed to start raising interest rates. The shift up last December by 25 basis points is generally taken to be the first of multiple increases. One effect of this is continuing strength of the USD and relative weakness in other currencies including our dollar.
Whilst the world is currently caught in a deflationary environment, higher US rates and money exiting other markets to take advantage of positive US returns could spark inflation there. For us, this obviously means higher costs of imported goods and problems for exporters.
Offsetting this risk are demographic profiles (aging populations with restrained spending behaviour) and advances in technology (reducing costs for many products and services) which will continue to add deflationary pressure to advanced economies. Adding to this are continued drops in commodity prices matched with oversupply at the same time. Trade indicators such as the Baltic Dry Index - a measure of global shipping costs now at multi-year lows - also suggest no quick turnaround.
2016 will probably be the point where we see which of these competing pressures gets the upper hand for the next few years.
In the first few days of 2016 China has made headlines and affected markets globally. The risk of a 'hard-landing' has really come to the fore. We continue to be a little perplexed by reactions to Chinese data. When official government numbers are released suspiciously quickly, are amazingly close to official targets, or literally do not actually add up then those numbers should never be taken to be the truth. Yes, there are problems but we expect China to manage them. We can't see any scenario where the Chinese government will allow years devoted to opening markets and internationalising the Yuan to be squandered.
All in all, we think the Australian economy is still fairly positive and consequently businesses should be aware of how lucky we continue to be.
Here's how the issues noted may affect retail business on the ground.
We spent 2015 predicting a good year for the retail sector and increases in consumer confidence. That's how it turned out. An increase in discretionary spending was seen, and the drop across 2015 for the AUD was a factor in increased domestic retail spending rather than international purchases. Continued weakness in our currency should see this continue.
If deflation persists, then continued reduced input costs could help businesses which are not reliant on import components maintain healthy margins. This can help the smaller guys.
Major retailers utilising currency hedges are likely to have expiring contracts unwind into AUD softness and consequently may seek to pass on higher costs. Alternatively, margins could be under pressure for these retailers if they seek to maintain sales volumes.
This will affect the overall competitive environment in retail and could be beneficial for smaller retailers better able to take advantage of flexible input structures.
The deflation-inflation tussle will obviously impact consumer behaviour in terms of spending patterns. Deflation has been highly noticeable in groceries and buyers are accustomed to $2 bread and milk. Lower grocery prices tend to see people make more visits to the supermarket, even if they spend relatively little each time. A low basket-spend leaves consumers willing to spend on a few additional goods on the way out each trip, whether these are in-store promotions or on products elsewhere.
If inflation comes, this will change. Businesses need to be aware of consumer psychology and how this affects buying patterns. Of course, wages growth needs to be factored into this.
Consumer confidence will obviously be important and at the start of the year it's being tested with concerns around China and its impact on global markets. We still think this concern is exaggerated. That said, some of the structural problems there (just like in the US, Europe, Japan etc) will need to be fixed one day, and this won't happen in a way that will keep everyone exposed to those problems happy.
Property markets are not expected to be as vibrant as the past 12 months. Australian property - particularly higher value residential markets in Sydney and Melbourne - have been driven by Chinese capital more than many would care to admit. Efforts by China to fix the economy in China are not likely to involve allowing continued capital flows to various property markets around the Pacific Rim. Prices will likely come off and this will affect consumer sentiment and spending propensity. Late-cycle demand will still flow through and drive sales for goods like furnishings and appliances though.
There are plenty of risks out there but our economy seems well placed to handle the macro issues 2016 will present, and consequently we think businesses will be able to achieve some good results for the year.
At ZenBus Advisory we provide guidance on industry outlooks and more importantly we can work closely with you to show you where your best business opportunities are and how you can take advantage of them.