There is a risk that households in early stages of financial stress will sharply reduce their non-essential spending, which can “contribute to or exacerbate” an economic downturn.
“In extreme cases, financial stress can have implications for financial stability. Households in severe financial stress are unable to service their debts, which could lead to losses for lenders and – if sufficiently large and widespread – could cause them to reduce lending or to become financially stressed themselves,” the bank says.
The good news is we’re not there yet, but the bad news is the RBA will have to push more households into financial stress to take more demand out of the economy and bring down inflation.
The central bank is forecasting inflation to remain too high for the next couple of years, and so more interest rate increases remain a live possibility as the RBA tries to cool demand with higher interest rates.
And the risks to the economy are increasing. The RBA said many households are experiencing a “painful squeeze on their finances”.
More rate rises will undoubtedly tip more households into financial stress and crunch the economy as people cut down on or cut out eating out, holidays, car upgrades and home renovations.
Among those households unable to pay their bills, three in 10 will have run down their savings by January, the RBA said, which will leave them in a precarious financial position in 2024.
And it’s not just those who are struggling to pay their mortgages who are running down their savings: “More recently, however, the flow of new savings has slowed, including excess payments into offset accounts and redraw facilities,” the RBA said. That is, Australians have stopped putting extra money into their mortgages as a buffer.
Australians have been diligent savers in the past few years, which put many households in a strong position to withstand interest rate rises.
The risk now is, as the savings rate slows and potentially goes into reverse, more Australians will become vulnerable to further rate rises, and this could spill over into the economy if large numbers of households sharply reduce their spending.
At the moment, unemployment sits at just 3.7 per cent, and while some households are suffering, there are a large number who aren’t. They either don’t have mortgages or earn enough to withstand the pain of interest rate rises.
The RBA still faces a difficult task in reducing inflation, and might have to spread the financial pain more widely and put more people out of work to do so.
Fund manager shares slide
Shares in embattled fund manager Magellan shed 20 per cent of their value last week as the company revealed investors continue to pull cash out of its funds.
It’s an illustration of how hard it can be to win back the confidence of investors.
Magellan has to juggle two sets of investors.
The first group consists of those who choose to put money into its funds. On Friday, Magellan revealed investors pulled close to A$2 billion ($2.1b) out of its funds. Most of the withdrawals came from professional investors - institutional clients. Withdraws and low investment returns together shaved A$4b off the value of funds under Magellan’s management.
It now manages just A$35b in clients’ money. That’s less than a third of the A$115b in funds under management it had in mid-2021.
The second group of investors is shareholders. The number shareholders are most interested in is funds under management, because fund managers charge a percentage of funds under management, sometimes with extra fees for good returns.
Magellan’s success was built around its founder Hamish Douglass, a renowned stockpicker who investors were happy to back. But they lost faith with revelations last year that Magellan’s global strategy had underperformed the relevant MSCI index by about 14.5 per cent in the past 12 months, and by about 5 per cent over the past three years.
There were also concerns Douglass would be distracted from his work by the fallout from his divorce.
He stepped back from the company, but this failed to assuage investors’ concerns.
David George - who took over as CEO in July last year - is aiming to return funds under management to over A$100b by 2027.
But judging by investors’ reaction to the latest news, they aren’t confident he’ll be able to do it.
