On Tuesday week, economists and the bond market are tipping an interest rate rise of 0.25%. And tomorrow we hear from RBA Governor Michele Bullock and the Assistant Governor and chief economist Sarah Hunter, who could try a softening up process to get us ready for the hike, which looks likely next week. And while many respected economists are now talking about two or three rate rises, I think they’re underestimating the impact of the net wealth effect coming out of the housing crisis.
One of those effects has been a new rush to super, which could be a higher level of savings that will not only help the stock market, because super funds buy stocks, but it could also help reduce inflation, while slowing down the economy at the same time.
Before I explain how, here’s the news story from The Australian today. Following the property tax changes in the Budget affecting both negative gearing and the capital gain tax discount, The Australian reports that “voluntary contributions at the nation’s biggest fund, AustralianSuper, spiked 35 per cent in June compared to the previous June, and continued climbing in July and August, largely from members aged 50-66.”
It also found that “retail super giant MLC experienced a 35 per cent spike in extra super contributions between May and August compared with the same period last year.”
Industry watchers say “more people are considering selling investment properties and funnelling that money into tax-friendly superannuation, an investment pool now worth $4.8 trillion.”
This would be seen as a victory for Treasurer Chalmers’ colleagues in the industry super fund sector as these funds make money as a percentage clip of the ticket on funds under management.
But what are the economic effects of one-time property investors now becoming super savers instead?
Try this:
- Stocks prices should benefit because super funds buy shares, which push up the returns of super funds, provided there’s no market crash.
- One-time property investors will now be more exposed to a more volatile stock market compared to the property market.
- The Government will see less tax deductions with less property investors using negative gearing. That’s good for the Budget’s bottom line.
- The economy will slow because putting money into super is saving and this reduces consumption/investment and slows the economy down.
- It does little to encourage home construction as super funds have told us that they’re not going to rescue the housing sector with their members’ money.
So, with interest rates expected to rise after Tuesday week’s expected cash rate rise from 4.35% to 4.6%, what are the big data drops that could sway the RBA’s decision, either way, on raising or doing nothing with rates?
Thursday’s unemployment number is tipped to be at 4.5%, but if it’s a lot bigger, then there could be a chance that the RBA will wait until November.
I think this is a longshot bet, because the central bank board is concerned that inflation is sticky above 3%. However, if a bad jobless number was followed up by a rate rise, on top of this landslide of super contributions, as well as all the negatives around for housing construction, thanks to the Budget and the collapse of builder Bathla, then the RBA might think all this could be enough to scare the spenders and price risers who are driving our too high inflation.
Throw in the negative wealth effect from the Budget that follows when homeowners think they’re less wealthy as their home value falls, and then those tipping three rate rises, and maybe even two, could prove to be over-the-top alarmists.
I hope that proves the case because I’d prefer to dodge a recession.
