- It’s been more than 26 years since Australia last saw a recession.
- Along with past reforms, a floating exchange rate and China’s rise to economic prominence, a major factor behind Australia’s economic success is strong levels of population growth.
- UBS says while this will continue to underpin headline GDP growth in the years ahead, it won’t necessarily lead to faster wage growth, inflation or interest rate hikes from the RBA.
It’s been more than 26 years since Australia’s last recession, a near-unprecedented, or unprecedented stretch of uninterrupted growth depending on who you ask, for a developed economy not experiencing an economic downturn.
Asian financial crisis — yep, got that covered. Global financial crisis — wait, hold my beer.
No matter what’s been thrown at the economy since the early 1990s, Australia has seemingly defied the odds.
While past reforms, a floating exchange rate, China’s rise to economic prominence have all contributed to this enviable growth streak, there’s one factor in particular, especially over the past decade, that’s contributed even more.
Booming population growth.
When real GDP is measured in volumes, it helps to have more people. They consume, need to be housed and require infrastructure to get around, keep healthy and to receive an education, helping to boost aggregate demand.
For sure, it’s not the sole reason for Australia’s recent economic success, but it’s played a large part, says George Tharenou, Economist at UBS.
“Strong population growth is a key driver of Australia’s world record of 26-plus years of GDP growth without recession,” he says.
“The strength of population growth has supported real GDP to grow by a solid annual pace of 2.5% to 3% in recent years, which is around most estimates of ‘trend’.”
However, underlining the point that a fast growing population makes it more difficult for an economy to fall into a recession, Tharenou says that per capita GDP growth — the average increase in output per person — has grown substantially slower than headline GDP, especially since the GFC.
“Per capita GDP growth has been much weaker around 1% for much of the post-GFC period, and only around half of the pre-GFC trend of about 2%,” he says.
The impact of population growth was clearly seen in the latest set of national accounts released for the March quarter this year.
Real GDP grew by 3.1% from a year earlier, faster than the 1.5% lift in real per capita GDP over the same period. The 1.6 percentage point difference reflected the increase in Australia’s population.
As Tharenou suggests, rather than an improvement in productivity, much of the headline growth has come through population growth, especially immigration from both permanent and temporary migrants.
Indeed, he says such has the scale of the increase been, it should be called a “people boom”.
“Population growth remained strong in 2017 at 1.6%, or 388,000, with the majority led by booming net overseas migration (NOM) of 240,000,” he says.
“However, our analysis of ABS data of recent migrants finds standard population growth understates the reality of booming ‘people growth’.
“Many migrants on temporary visas will likely not yet be counted in the NOM/population data.
“These temporary visa numbers doubled since 2007… to a record level in 2016 of 663,000, or a 2.7% share of population… with more than half of these visas for students which have surged to a record high around 400,000 in 2017.”
So it’s not just permanent migration and natural increase that have fuelled the people boom, but temporary arrivals as well.
Like citizens and permanent residents, they too add to aggregate demand.
Tharenou expects those trends will persist in the years ahead, underpinning GDP growth and the likelihood that Australia’s run without a recession will lengthen even further.
“Looking ahead, and absent an unexpected and material change in government policy, the current surge in temporary visas is likely to drive ongoing strong migration, and hence population growth, in coming years,” he says.
“This will support ‘headline’ GDP growth, especially via exports, [but also through infrastructure investment and housing demand].”
However, while such an outcome will be great for headline economic growth, as has been discussed at length in recent years, having a fast growing population does not come without its challenges for policymakers and those already living here.
Stretched infrastructure, cost of living pressures, social cohesion and environmental damage, among others — they’re all issues that have been debated, and will continue to be debated, for some time to come.
And while a strong supply of people helps to boost demand, which in turn helps to create employment, as many workers have found out in recent years, more people also means plenty of competition for available positions, contributing to weak wage pressures.
While there are other factors that have contributed to recent low wage growth outcomes, Tharenou says this factor cannot be ignored.
“Many migrants are young, skilled and educated. Hence, recent migrants and temporary citizens have a much higher labour force participation rate of around 70% than the total population at about 65%,” he says.
“This ‘positive labour supply shock’ is likely to continue to cap wage and inflation pressure, consistent with the trend increase in the participation rate which has been a key factor leading to lower average wages over recent years.”
And despite the likelihood that headline GDP will remain firm in the years ahead thanks to strong population growth, Tharenou says this will inhibit the Reserve Bank of Australia (RBA) raising official interest rates.
“Combined with our view that housing weakens further, we continue to expect the RBA to stay on hold until 2020,” he says.
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