Advisers Can Provide Stability During Economic Rollercoaster

In a fragmented world of financial and political turmoil, advisers are among those who can listen to their clients’ concerns, understand their goals, and provide a beacon of light, writes Financial Advice NZ’s Katrina Shanks.

There’s something refreshing about pausing and taking stock, especially when so many things are shifting around us. It’s in these moments of reflection and insight that we gain perspective. It helps us identify the key threads, so we can follow them without getting tangled up.

So, it was once again a pleasure to have economist Cameron Bagrie as a guest last month, as part of our Bring in the Experts webinar series. His Economic Update sessions are always extremely insightful, and this was no exception – watch the recording at Financial Advice NZ.

To me, it was an opportunity to think about the advisers’ role in the world we live in, and their being the sense-makers that Kiwis need. With this in mind, here are some points to ponder over in the coming months.

It’s not the same world out there

One of the most interesting points that Cameron raised is how different the environment is now, compared to what it was.

Many of the characteristics of the global economy that we used to take for granted have now reversed. Globalisation has lost momentum and doesn’t seem to find a place in an increasingly fragmented world.

Low interest rates are a thing of the past, and so is low inflation. Meanwhile, it’s no longer an employer’s job market, as labour shortages are giving employees more negotiating power.

It looks like the very fundamentals of the economy and our society have been pulled away from under us. To take the next steps forward, we first need to find a solid foothold in the uncertainty. This is also what Kiwis are looking for: guidance, a beam of light to clear the way.

By knowing what’s on their clients’ minds – their concerns, their goals, their aspirations – financial advisers are well-positioned to be part of Kiwis’ support team. And the number-one issue for New Zealand households is anything but surprising.

Inflation is the top challenge

A year ago, even the experts at the US Federal Reserve believed inflation would be short-lived, just a temporary by-product of supply chain issues. Some say this misplaced confidence was the reason the Fed waited too long to intervene.

What we do know is that inflation wasn’t short-lived at all. In fact, no matter how aggressive the interest rate hikes are, inflation is proving to be a stubborn, unwanted houseguest. And the stickier it is, the more it raises concerns among consumers.

…inflation is also pushing up life insurance costs…

According to the latest IPSOS New Zealand Issues Monitor (September 2022), inflation was the top issue for Kiwi households in the third quarter. Interestingly, the issue of ‘housing’ has now lost its long-held number-one position and came a distant second – further proof that the property market has well and truly turned.

Meanwhile, there’s no missing it: the rising cost of living has already pushed up prices across the board, making it harder for Kiwis to save money regularly. Of course, this has an impact on people’s financial resilience.

Now that emergency funds are more important than ever, keeping them is all-the-more challenging. And on top of this, inflation is pushing up life insurance costs, which could potentially prompt some people to give up on their financial protection to free up cash.

In this framework, it’s crucial to remind clients of the value of personal cover, with a focus on value-for-money and strategies for making room for insurance in the budget. The goal is, and will continue to be, Kiwis’ financial resilience.

The downsides of lower-than-ever unemployment

The good news is that unemployment and rising wages have been helping soften the impact on household budgets. The not-so-good news is that unemployment needs to rise for inflation to fall, but there’s no clear end in sight for systemic labour shortages.

In fact, the current view is that they may become a persistent feature due to the ageing population. The negotiating power is now with the employees, rather than the employers.

The negotiating power is now with the employees…

According to the Westpac-McDermott Miller Employment Confidence Index, in the third quarter of 2022, Kiwis’ confidence in the labour market was at its highest level since June 2019. People are reportedly upbeat about the range of job opportunities, especially among younger workers.

But if unemployment is not a concern right now, it’s important not to let this confidence overshadow the need for income protection. Serious injuries and illnesses can easily set back workers physically, financially, and emotionally.

Once again, advisers have a key role in highlighting these risks for clients and helping them achieve real financial security – no matter what life throws their way.

More shifts are on the cards

As we’ve seen, the factors currently at work are closely intertwined. Our economy is in good shape, but there are mounting pressures on key indicators. Persisting inflation is bound to hit costs and profits, and central banks are walking a tightrope between rising interest rates and recession risks.

Is a reset underway? That’s the overarching question. As Cameron pointed out, that’s what the economy needs to rebalance. But before then, some structural shifts are coming, if not already happening.

People are switching jobs and switching countries, fuelling a global war on talent. Their spending is also switching, from goods to holidaying. And the construction market may soon switch from building to renovating.

In many cases, it’s a post-pandemic reversal. In others, it’s a new direction that the pandemic has led the world to. Either way, this is shaping up to be the ‘new normal’ we mused on for nearly three years.