Australia brought up a historic, and near unprecedented economic record in the June quarter this year: 25 years of uninterrupted economic growth.
At 3.3%, the year-on-year GDP growth rate was the fastest pace in four years, a remarkable achievement given Australia is in the midst of an economic transition on a scale never seen before.
It has truly been an amazing run, second only to the Netherlands in terms of a period without a recession for a developed economy.
But it has been assisted.
Strong population growth meant that real GDP — measured in volume terms — has been given a substantial boost over this period.
To use an athletics analogy, if the Australian economy was in a 100-metres race, the population tailwind assisting growth would be a gale.
Other factors have also contributed — past reforms and the rise of Chinese economy just to name two — but it’s clear that more bodies helps create more demand, providing an unquestionable boost to GDP.
Gareth Aird, senior economist at the Commonwealth Bank, agrees.
“Having a strong population growth rate is great for aggregate growth rates, like GDP, because it allows them to be higher than otherwise for a given level of productivity growth,” he says. “It also means it is much harder for the economy to enter a technical recession – defined as a fall in GDP over two consecutive quarters.”
However, according to Aird, “if we want to measure changes in living standards, which ultimately matters most to households, then we need to look at how the economy is going on a per capita basis rather than just reporting and focusing on measures of aggregate demand”.
That’s exactly what he’s done, producing an excellent research note evaluating Australia’s economic performance on a per capita basis, not only looking ratios but also the side effects from population growth.
After crunching the numbers, and producing some top-notch charts, he says that the performance “is a little more sobering”.
Here’s some of the charts he’s produced, along with an explanation on each:
Australian GDP adjusted for population change
Compared to real GDP at 3.3%, GDP per capita is currently running at 2% per annum, the fastest pace seen since the global financial crisis. While still an impressive figure, Aird notes that “there has been a substantial contribution to GDP growth coming from net exports and more specifically resource exports.”
Aird says that “GDP per capita growth looks healthy and should continue to stay buoyant over the next few years”, but acknowledges that “it gives a misleading impression at the moment of both domestic demand per capita and income per capita”.
It’s a temporary factor, in other words, the by-product of Australia’s now-unwinding mining infrastructure boom.
The living standards of Australians
Nor has population growth done much to boost the living standards of Australians, says Aird.
“Real net national disposable income (RNNDI) per capita is a bit of a mouthful to say, but according to the ABS, it is ‘considered a good measure of progress for living standards because it is an indicator of Australians’ capacity to purchase goods and services for consumption,” he says.
“The news on RNNDI per capita is pretty ordinary at present.
“Fortunately growth in RNNDI per capita recently turned positive, but only after a four-year period where it was falling.”
He suggests that “the decline in the terms of trade contributed, in part, to the fall in RNNDI per capita, just as it boosted per capita growth in the decade up to 2012.”
Moving forward, he says that without a sustained lift in the terms of trade, which he isn’t forecasting, per capita income growth “looks like it will remain soft over the foreseeable future”.
Increased labour market slack
While increased population growth has helped to boost total employment levels, it is also contributing to increased labour market slack as additional workers enter the labour market.
This is reflected in Australia’s underemployment rate — those who have a job and want to work more but can’t find the work — which currently sits at 8.7%, the highest level on record.
Even with the recent decline in the national unemployment rate, Australia’s labour market underutilisation rate — something that combines unemployment and underemployment — currently sits at 14.3%, above the levels seen during the global financial crisis.
“This means that the economy is operating below its capacity and there is an output gap,” Aird says. “This has had implications for wages and inflation.”
When he says implications, he is implying weakness — something that has been seen in recent inflation and wage growth figures.
Capital city house prices compared to household income
“The high dwelling price to income ratio is reflecting the combination of low interest rates and strong population growth, which have fuelled dwelling prices, coupled with weak household income growth,” said Aird.
“As the Australian Productivity Commission noted in April 2016, ‘high rates of immigration put upward pressure on land and housing prices in Australia’s largest cities. Upward pressures are exacerbated by the persistent failure of successive state, territory and local governments to implement sound urban planning and zoning policies’.”
Given increased population levels, particularly in Australia’s eastern capitals, Aird has looked at changes in travel times given he considers “traffic congestion and commuter times to be an important measurable component of well-being”.
“Strong population growth in Melbourne and Sydney, in particular, has led to an increase in average travel times for commuters on the road,” he says
“A recent report by Infrastructure Partnerships Australia (IPA) found that road network performance has been negatively correlated with population growth. In other words, road networks have become less efficient as population growth has lifted.
“According to the report, Melbourne has had the sharpest deterioration in road efficiency over the past year and unsurprisingly it has the strongest population growth rate across Australia’s capital cities. Sydney has experienced the second biggest deterioration in road efficiency and also sits just under Melbourne in terms of population growth.”
To Aird, without a commensurate increase in transport infrastructure then traffic congestion, by definition, will rise, further lowering living standards in his opinion.
So there we have it — more than a few talking points when it comes to the net benefit of population growth.
It’s an interesting take on what has been a major contributing factor behind Australia’s economic success, and will no doubt rise questions over the social cost that’s been required to deliver 25 years without a recession.
Aird certainly believes it does, suggesting it “points to the need for a comprehensive and open discussion around the policy direction Australia is taking”.
“Strong population growth is boosting aggregate demand and therefore the growth rate of the economy. But measures of per capita outcomes are more sobering and suggest that not enough emphasis is being placed on them in the policy debate,” he says.