27 September 2023

Super system shields against macro storm

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Cassandra Baldini* says Australia’s superannuation system has put it in a better position than other countries to weather the coming global economic storm.

Australia’s compulsory superannuation system is one factor that has helped weather the global macro storm, explained SG Hiscock & Company portfolio manager Hamish Tadgell.

Speaking with Financial Standard, Tadgell explained that Australia’s super system has helped stabilise the population and economy.

“Superannuation, among other things, has generated a fair degree of social harmony in a relative sense,” he said.

“If you work hard here, you’re going to have a savings pool at the end of the day because you have 10 per cent or 12 per cent of your salary put into super.

“In a lot of countries, if you don’t work hard, you end up potentially with very little.”

Tadgell pointed out that kind of financial insecurity breeds social disharmony, contributes to a greater divide between political polarisation in politics and breeds the debate around inequality, which all work towards destabilising the system.

“What then needs to happen is you get more radical policies, and then you get handouts.

“Fiscal policy has to come in and try to address some of those social imbalances,” he commented.

“In Australia, we’re in a fortunate position, we have a government balance sheet that allows us to put welfare initiates in place and in addition to that I think compulsory super creates a strong framework and is why Australia is as it is in terms of a stable economic system.”

He explained that super is not the only reason for strong economic growth.

“Other contributing factors are population growth, the fact that we’ve got a lot of what the world wants in terms of soft and hard commodities,” Tadgell said.

“And that is fed into 30 years of uninterrupted economic growth and contributed to the fact that we haven’t had a recession.”

Tadgell questioned the possible reason behind the long-standing stability, saying: “Is that good luck, good management, a function of a strong political system and robust democracy, or a strong superannuation system?”

“I’d say all those things contribute to it.

“But I think it’s important to recognise a lot of countries don’t have that superannuation system and that is something that is an important characteristic of making Australia what it is.”

Looking ahead, it’s not clear if the nation will swerve a possible 2023 recession, but Tadgell said Australia is in a better position than Europe and the US.

“I think it’s really a difficult call,” he said.

“The existential question at the moment is how far central banks will have to push interest rates to get inflation under control.

“And the higher they push interest rates, the bigger the risk that we have an economic downturn.”

He said tighter financial conditions will add to a bigger drag on demand leading to a slump in growth and a potential increase in unemployment.

“Clearly what government and central banks are trying to do at the moment is rein in inflation and create a soft landing where we don’t see a rise in unemployment, and it doesn’t destroy growth to the point which will go into recession,” he commented.

Rate increases are intended to take the heat out of the economy and slow the demand, however, Tadgell said the question is whether it can be done in a manner that creates a soft landing versus a hard landing.

“Now, history would suggest that when you get inflation like this, it has led to recession,” he explained.

“Whether it’s going to be a deep recession, that’s certainly not our view but whether we get a technical recession, I think it’s incredibly hard to call from here.”

Last week the Reserve Bank of Australia (RBA) hiked cash rates a further 25bp to 3.10 per cent.

“And it looks like they’re signalling that they’re going to have to put up rates again next year that’s going to have put pressure on financial conditions and households,” Tadgell said.

“But whether it cascades dramatically into lower profit growth causing companies to cut costs and run the risk of unemployment, the usual spiral into recession, is the question.”

*Cassandra Baldini is a Senior Journalist at Financial Standard.

This article first appeared at financialstandard.com.au

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