Australia is increasing relying on population growth to fuel its economy -- and that could be a problem

Crowded Istiklal street in Istanbul
  • Australia has now gone close to 27 years without experiencing a recession.
  • Population growth has been a large part of that story, especially in recent times.
  • Economists say reforms are required to help boost productivity growth.

Australia has now gone nearly 27 years without experiencing a technical recession, defined as two consecutive quarters of negative real GDP growth.

Depending on who you ask, some think it’s the longest stretch of uninterrupted growth for an advanced economy on record.

While luck, reforms and Australia’s close and growing ties to Asia have all contributed to Australia’s economic success, population growth has also played a part.

Especially in recent years. Just take a look at the chart below as evidence.

It shows year-on-year growth in both real and per capita GDP going back to Australia’s last recession in the early 1990s.

While Australia’s growing population has always helped to increase headline GDP which is measured in volumes, its contribution has been especially large since the global financial crisis, sitting well above the levels seen in the pre-crisis era.

In the year to December, real GDP grew by 2.36% in seasonally adjusted chain volume terms, well above the 0.8% increase in per capita GDP.

That means of the 2.36% growth rate reported, 1.56% was driven by population increase, continuing the greater impact population growth has had in recent years.

From Australia’s last recession to just before the GFC, population increase, on average, contributed 1.24% to annual GDP. In the period since, that average has risen to 1.66%.

So Australia has been increasingly relying on more people, rather than improved productivity, to lift economic activity.

Stephen Walters, chief economist at the Australian Institute of Company Directors, said this makes the Australian economy a little vulnerable without an improvement in the latter.

“Nearly three decades without recession means we carry significant excesses into the next downturn, not least of which is record-high household debt,” he says.

“This baggage risks making the next recession, whenever it comes, unusually painful.”

Walters says it comes as little surprise that Australia is struggling to generate faster rates of economic growth right now, even with strong levels of population growth.

“Effectively, we have run out of booms, having seen a succession of good fortune drive this extended period of all but uninterrupted growth since the last serious downturn in the early 1990s,” he says.

“Absent another boom — and it’s not clear what the genesis of that will be — the next phase of our growth probably will be sourced from much-harder-won gains in productivity growth.

“These gains usually stem from sustained reform, which has been largely absent of late.”

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