How to navigate 2023: Trends and tactics
Experts at the Westpac Sustainable Future Forum delivered cues for action for Australian business leaders as they prepare for a new year dealing with a range of highly dynamic issues.
Increased vigilance around cyber threats and holding back on price rises for products and services are just two of the pressing issues that should be top of mind for business leaders as the nation moves into 2023, according to experts at the inaugural Westpac Sustainable Future Forum.
While the spectre of cyber-attacks has been the biggest headline grabber, with high-profile ransomware attacks on Optus and Medibank providing a clarion call for all businesses to get their cybersecurity in order, attendees at the no-holds-barred forum also learned how to fine-tune strategies to deal with soaring inflation, rising interest rates and supply-chain fallout from Russia’s invasion of Ukraine.
Australia’s 26th Governor General, Sir Peter Cosgrove, AK, CVO, MC (Retd) and Westpac Chief Economist Bill Evans spearheaded the line-up of thought leaders who cast light on what’s happening across the geopolitical and business landscapes, with advice for business leaders on how to prepare for what’s next.
On the geopolitical front: Safeguarding our sovereignty
Australia’s response to geopolitical tensions dominated forum discussions, with General Sir Peter Cosgrove, delving into the trade and diplomatic standoff with China, the future of the Indo-Pacific region and Russia’s invasion of Ukraine.
In conversation with Westpac Institutional Bank Chief Executive Anthony Miller, Sir Peter observed it is clear China is establishing its own version of sovereignty in the South China Sea, building atolls to establish a footprint in the area and then using them to justify territorial claims.
It’s “a big problem” for two reasons – first, it affects the freedom of navigation of North Asian trade and, second, it could spark territorial counterclaims from the likes of Brunei, Malaysia and the Philippines. “It’s another hot bed,” Sir Peter insists.
Unfolding friction in the Indo-Pacific region demonstrates why Australia must reset its standing in the area, according to Sir Peter. “Australia has fallen off the pace over time through being focused on other areas and perhaps not noticing, or not appreciating, it was about to follow that China would be leaning forward on its place in the world order.”
He believes the AUKUS security pact with the United Kingdom and the United States, and the Quad partnership with Japan, India and the US provide an opening for Australia to reassert its priorities and strengths. “The Quad is hugely important,” he says. “It gives us the opportunity to engage initially on the security level, but then on the social, cultural and economic level with India.”
Sir Peter is encouraged that Prime Minister Anthony Albanese has engaged in talks recently with Chinese President Xi Jinping and Premier Li Keqiang. “We must work tirelessly to settle things down.”
While Russia’s invasion of Ukraine has had dire humanitarian and energy repercussions, Sir Peter says one positive is that it has galvanised pro-democracy forces. The US alone has poured in massive aide, including the supply of about 7000 Javelin missiles. Derailing Russian President Vladimir Putin’s calculation that NATO and other nations around Ukraine “would go to pieces”, Sir Peter says the invasion has “had the opposite effect of bringing them together”.
On the economic front: The lowdown on the inflation threat
Earlier in the forum, Westpac Chief Economist Bill Evans set the mood by urging government, financial and business leaders to get on the front foot and appreciate that navigating ongoing economic complexities demands knowledge and expertise.
Looking back on the out-of-control inflation in the late 1980s and 1990s that led to the “recession we had to have”, Evans says a more proactive approach is needed now: “We have to be really careful and not complacent that we don’t fall into that trap again of not dealing enough with the inflation problem.”
Evans also refuted Reserve Bank of Australia (RBA) suggestions that Australian inflation remains inconsequential compared with international counterparts, insisting that “Australian inflation is part of the story”.
He warned Australia not to be complacent about present inflation levels after the headline Consumer Price Index (CPI) rate hit 7.3 per cent in September 2022, but Evans says it is clear that the global inflation shock of the 1970s – memorably leading to Australian interest rates approaching 18 per cent in 1990 – was “more extreme than the one we’re facing today”.
Lessons should be applied from that crisis to better manage inflation in 2023 and safeguard the Australian economy and businesses, he believes. Inaction and problems around the indexation of wages meant that it took the nation a decade to control inflation in the 1990s. “And the price we paid was very high,” says Evans.
On the future: Business psychology and pricing
Inflation – largely on the back of rising shipping, building and electricity costs – will be the key factor draining confidence for the year ahead, Evans predicts.
Despite the RBA’s efforts lifting interest rates to bring inflation back into its preferred band of 2–3 per cent, very low unemployment means most people have job confidence and a capacity to spend. The household balance sheet is bulging with about AUD 260 billion in savings as a result of low spending during COVID-19 lockdowns and people drawing down on their superannuation.
The other factor that could curb RBA efforts to rein in inflation is the psychology of the business sector, which is fighting back against surging wage and operational costs by increasing prices for products and services.
“Central banks have to send that signal to them that no, the game’s up, you can’t raise your prices anymore and that’s how you ring the inflation out of the system,” Evans says. “But we do hope that when that happens that businesses are able to at least protect some of their margins.”
The RBA may be hard-pressed to bring down inflation, Evans suggests. If markets lose confidence in the RBA’s ability to control inflation, that could have implications for bond rates, which have to date been performing reasonably well.
On cyber defence: “It’s a team sport”
All sectors and organisations are vulnerable to cyber threats and need to muscle up cyber-defence, the forum audience heard.
In the aftermath of the Optus and Medibank cyber breaches, Westpac’s Head of Cyber Strategy and Advice Simon Brown and Head of Fraud Ben Young cited the latest statistics from the 2022 Australian Cyber Security Centre Threat Report: the ACSC received more than 76,000 reports of cybercrime in the 2021-22 financial year, an increase of almost 13 per cent on the previous financial year.
Threats are manifesting in three key ways – through high-impact and increasingly-visible ransomware attacks; via nation-state affiliated attacks, seeking access to valuable data, or to prepare to disrupt critical infrastructure; and through collateral impacts from others’ breaches.
“In 2022, no organisation is an island,” Brown says. “Every organisation is connected digitally, upstream and downstream, to its suppliers and customers. That brings phenomenal business benefits and great efficiencies, so we need to continue with that.”
Organisations must be conscious that the data they share with suppliers and customers can be targeted at any point in the supply chain, and cyber-attacks can cause business disruption for all parties.
Behind the scenes, cyber defence tactics at the bank include phishing simulations to test how employees react to threats, and education and awareness programs for staff.
Westpac is also continuously ramping up its internal fraud prevention efforts to disrupt attackers and protect customers using sophisticated algorithms and collaborating with other industry players to thwart the fraudsters, Young says.
Young says it is also incumbent on businesses and customers to educate staff about cyber threats, especially accounts payable teams. “The bank is here screening your payments, but it’s a team sport,” he told attendees.
Young also urges organisations to embrace more secure payment methods such as PayID, a free and easy-to-remember identifier such as an ABN, mobile number or email address, that is linked to an eligible account.
On the balance sheet: Vigilance on volatility
In volatile times, robust banking and prudent lending services will be crucial to support business security and growth. Group Treasurer Jo Dawson looked to the Westpac Group’s balance sheet reporting an overarching profit for the 2022 financial year of 4 per cent, and delivering insights on indicative trends.
Rising interest rates saw profit margins improve in the second half of the year, and the bank has continued to see positive growth in lending and deposit markets. Dawson says total lending was up 3 per cent in the second half of 2022, with growth across mortgage, business and institutional lending.
A standout trend is the sharp decline in fixed-rate lending from the peak pandemic high of about 50 per cent to about 11 per cent now. “That’s quite a significant drop-off,” Dawson says. Business lending in sectors such as property, agriculture and professional services is strong, despite broader market volatility – “a good indicator of what’s happening in the underlying economy,” she says.
In 2023, Westpac will be closely watching its mortgage book and how borrowers manage higher repayments as they come off fixed interest rates. Dawson and her team will monitor repayment levels, but she is upbeat about the outlook for banking customers. “Inevitably, some of our customers will face difficulty, but the vast majority of the portfolio and customers are very well positioned.”
On workforce changes: One last word
As the pandemic’s impact wanes and Australian businesses settle into a reconfigured hybrid workplace model, Sir Peter drew on his extensive experience as a team leader to offer a thought-provoking tip on new work practices.
While he admires the resilience and agility many businesses showed at the onset of COVID-19 with their quick switch to a work-from-home model, he believes leaders might think twice about the hybrid working model.
“In my military life, we were always together because you can’t defend Australia by sitting at home,” he says. “You have to be out and doing things as a group.”
In workplaces, Sir Peter also believes greater benefits flow from people working side by side “so you can actually do what teams do best – look each other in the eye and socialise with each other”.
“My instinct as a military person is to say that things work best when you are actually there for each other as human beings, rather than looking at each other through a screen.”
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