When the going gets tough

first_img Facebook Twitter: @NeosKosmos Instagram I know some readers breathed easy after the Reserve Bank decided to hold steady on interest rates this week. But have a look at the fine print, and you see that our central bank’s governor Glenn Stevens is expecting some interesting times for the economy over the coming 18 months.“Growth through 2011 is now unlikely to be as strong as earlier forecast. Over the medium term, overall growth is still likely to be at trend or higher, if the world economy grows as expected,” it states. In other words, the economy is in trouble for the second half of 2011, strengthening with growth again in 2012. The good news is that a weaker than expected 2011 could mean interest rates remaining steady, or it could mean a cut of a quarter or a half per cent. Where is this fear coming from? Have a look at the research from CommSec during last week, in which house and employment data is picked apart. House lending was at its lowest in 34 years and in May, house prices had fallen for five consecutive months. House prices in May were 2.3 per cent lower than they were the year before. Perth was down by 7.5 per cent and average house prices in Brisbane had dropped 5.9 per cent in the year to May. Most businesses in this country are ‘mum and dad’ firms whose business finance rides on the family home. These people are our biggest employers, so we shouldn’t be surprised that job vacancies fell 4.5 per cent in the three months to May; Victoria’s job vacancies dropped 14.5 per cent and Western Australia’s by 11.1 per cent. What does it mean? It should mean that interest rates drop before Christmas, before the economy takes off again in 2012 and interest rates have to rise to control inflation. But we’ve been seeing this two-speed economy where retail and house prices are flat while interest rates go up. So I wouldn’t place bets on interest rates: with the miners still enjoying record prices and massive orders, this sector alone might be able to keep inflation pumping. And if it does, a hold on interest rates is the best we can expect. My biggest tip right now is to get expert advice: Should you refinance? Fixed or variable? Buy property now, or wait a few months for a flat economy and weak employment to flush out some bargains? There’s a lot of barbecue experts doing the rounds right now. Avoid them – get expert advice and make a plan. Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on [email protected] with any queries you may have or check www.ybr.com.au for your nearest branch.last_img read more