War in Ukraine Won’t be Short. Get Ready for A More Expensive World.

As Russia’s war in Ukraine approaches the end of its first month, the sad truth is that the end of this escalating tragedy is likely nowhere in sight. 

For Australians, the fighting may feel like it is happening a world away, even as we watch it unfold in excruciating detail on our screens. Yet the political and economic consequences for the world are going to be massive, and we’re already beginning to feel them here at home.

Things are about to be more expensive in general for Australian SMEs – and it’s not going to be temporary. Here’s what’s going on right now and what you should do about it.

1. Costs are increasing, and supply chains will struggle.

Putin is facing harsh punishment for his actions in the form of crippling economic sanctions. These sanctions heavily restrict trade with Russia, but the immediate knock-on effect for the rest of the world has been a sharp rise in the cost of some key goods like oil and wheat.

If you’ve been unfortunate enough to go anywhere near a petrol station in the last fortnight, this probably isn’t news to you. But for Australian SMEs, this is likely only the beginning of the curve. As we face a more divided world, we can expect this to become the new normal.

You should start planning for all of your input costs to increase: energy, products, insurance, people, all of it. When the cost of essential items like fuel and food skyrocket, you can bank that almost everything else is going to follow suit very quickly. 

Supply chains that use air-freight will likely get trickier and more costly to maintain as well, as no-fly zones for Russian airlines are being enforced around the world. It’s placing extra stress on the already struggling global shipping system.

All of this hints at an uglier, more complex problem that’s waiting on the horizon – inflation.

2. Inflation shock is looking more likely than ever.

Debate has been raging about inflation in Australia for the last year or so. I’ve written a lot in the past about what inflation might mean for your interest rates, and what other countries can teach us about Australia’s situation right now.

It’s still unclear how Australia’s central bank will respond to this unfolding situation. The AFR suggests they may be “damned if they do, damned if they don’t” when it comes to raising interest rates, and I’m inclined to agree. In the meantime, you seriously need to be locking in the interest rates on your loan if you haven’t already.

If you’re interested in the nitty-gritty details of how inflation works, I’d recommend checking out the AFR article I mentioned above – it’s a great breakdown of the situation. Meanwhile, all that Australian business owners need to know is that this is just another sign that higher costs may be here to stay for the long term.

3. The stock market seems uncertain, to say the least.

Stock market chaos may have a less direct effect on your wallet and your business. But it’s a big piece of the economic puzzle, and it’s still worth mentioning. 

When the invasion first started a few weeks ago, the ASX closed on its worst day of losses in 18 months. No small feat, considering the year we’ve had. This worry isn’t going away either, with trading still skittish and experts expecting this uncertain period to last up to 6 months.

So what, if anything, should investors do? I’d suggest keeping a medium-to-long-term focus and not losing your head. If you’re still feeling nervous, speak to our investment and financial planning team or reach out to your existing advisor for specific advice about your portfolio.

History shows that the market generally corrects itself relatively quickly after wars or natural disasters. Of course, some affected stocks may require action, but generally, it’s best to ignore fluctuations, stay focused on your long-term goals and generally hold your nerve.

If you’re struggling right now and looking for advice on how to adapt your business to a higher-cost environment, you should speak with one of our business advisors. They’re always available for a free & confidential chat.

Above all, our hearts go out to the people of Ukraine and our thoughts are with the senseless suffering that is occurring there. This newsletter may be focused primarily on financial updates, but it’s impossible to ignore the real human cost of this tragedy.  

The information in this article is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

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