Super payouts, population growth fuelling inflation and rates: UBS

A boom in superannuation payments and record population growth are materially adding to consumer demand in Australia, potentially keeping inflation and rates high, says UBS.

A boom in superannuation payments and record population growth are materially adding to consumer demand in Australia, potentially keeping inflation and interest rates high, while also supporting the stockmarket, according to UBS.

The Swiss bank’s Australia economist George Tharenou says the total super benefits paid out over the four quarters to September look to have risen about 17 per cent on-year – double the historical average – to a record high of about $145bn.

Benefits paid in the September quarter soared to $29bn, equivalent to a 10 per cent of household income, a record high apart from when early withdrawals were temporarily allowed during the Covid-19 pandemic.

“This reflects the strong growth in the size of the asset pool, with total superannuation balances in the September quarter jumping by 9 per cent on-year to $3.6 trillion,” Tharenou says.

“Hence, the growth in benefits paid from these assets is also likely to remain very strong ahead.”

While Reserve Bank governor Michele Bullock argued this week that rising interest rate have increased the incentive for older households to save, the surge in benefits paid is also strongly boosting the effective income available to those who have reached preservation age.

“This is underpinning the consumption of older households,” Tharenou said.

“There is likely also a ‘spillover’ to other households via the ‘bank of mum and dad’, either to support lumpy costs of family members like private school fees, or perhaps even to support mortgage payments for those facing a financial squeeze, which is keeping mortgage arrears very low, despite the Reserve Bank hiking the cash rate by 425 basis points since May 2022.”

Tharenou says this trend is increasingly a “material driver of the Australian consumer”, making the economy “more resilient to RBA rate hikes” versus what historical models would suggest.

He also sees this as one factor “keeping inflation relatively sticky” above the RBA’s target band of 2 to 3 per cent, at least for the next year. In his view there’s a “growing portion of households who are much less sensitive to RBA rate hikes which would normally crimp consumer demand enough to see downward pressure on prices”.

This is especially the case when coupled by booming migration that’s lifting population growth by about 600,000 or a near record 2.5 per cent on an annualised basis.

It backs his view that the RBA’s cash rate target will need to be “higher for longer” at 4.35 per cent for the next 12 months, albeit with risk of another 25 basis points increase in February.

For the stockmarket, these factors have prevented a collapse in consumption in the face of interest rate hikes and a soaring cost of living. “The impacts which we had assumed would play out have largely been ‘non-events’, says UBS Australia equity strategist Richard Schellbach.

Despite 13 rate hikes over the past 18 months, the jobs market remains strong and the “seemingly bulletproof” housing market has seen home prices climb back to near record highs.

The local stockmarket has also proved fairly resilient to interest rate hikes in the past 18 months.

The S&P/ASX 200 index is only about 2 per cent lower since rate hikes began in May 2022.

Despite the most aggressive interest rate hikes globally in about 50 years, the S&P/ASX 200 only fell by a maximum of 11 per cent in the 18 months since the start of rate hikes.

While it has seen a couple of technical “corrections” in the past 18 months, there has been no “bear market” in Australian shares since rate hikes began last year. However, the Australian dollar has fallen about 8 per cent in this time.

Schellbach says this “suppression of the economic and profits cycle” (in a positive way) has been frustrating for equity managers with processes built around identifying cyclical turning points.

For 2024, he sees more of the same as super payments and migration continue to smooth the cycle. But with interest rates set to remain high, he sees “sideways” trading conditions for stocks.

It comes as UBS quantitative research on sector weights and crowding found investors are still fearful of a downturn in domestic activity.

Investors were “crowded” into consumer staples stocks and short financials, fitting with feedback from investors who have struggled for performance this year due to their defensive positioning.

Schellbach also says “relatively sticky” inflation in Australia versus other advanced economies means the rate differential which has weighed on the Aussie dollar over the last two years “could switch to a support”. Historically, the best sector bet for a rising exchange rate has been long mining versus healthcare.

It came as Citi upgraded its three-month iron ore price forecast to $US140 from $US120 a tonne and lifted its three-month copper forecast to $US8600 from $US7500 a tonne.

The US bank says China’s potential push towards fiscal expansion and broader property market support is likely to be “larger and more imminent than we previously expected”, as China looks to “engineer investment-led growth”.

“We now expect in our base cases that China will likely increasingly push towards fiscal expansion to engineer investment-led growth, and this time with a focus on urban village redevelopment/affordable housing to support overall property market related activity in 2024,” say Citi analysts including Paul McTaggart. “This results in a significant increase in our confidence around stable consumption from this portion of the market instead of declines which are forecast for the commodity housing component.

“Heading into 2024, our economists see the return of the pledged supplementary lending facility as a baseline to support the urban village redevelopment.

“China’s property new starts growth – commodity housing and urban village redevelopment – could potentially flip into positive territory from here if Beijing were to follow through.”