Treasury is cutting its GDP forecast from the 3% announced in the budget to 2.75%, an official announced yesterday.
The adjustment has come about because of a slowing in net migration to Australia and a long-term trend that shows the number of hours being worked is falling.
First, the population fall. Deputy Secretary for the Macroeconomic Group at Treasury Nigel Ray explained:
Australia has experienced rapid population growth over the past ten years, fuelled by solid increases in net overseas migration. This came on the back of our relatively strong economic performance and low unemployment compared to other countries. But as economic growth has softened, recent immigration outcomes have come in lower than the Department of Immigration and Border Protection initially expected. This mainly reflected declines in temporary visa holders and lower net migration from New Zealand.
Bloody Kiwis. (Back in April, thanks in part to many New Zealanders moving home, long-term migrants moving from Australia to New Zealand outnumbered those heading in the opposite direction, for the first time in 24 years.) Anyway, here’s the chart, showing that the forecast for the amount of workers available to the economy was too high:
Then there’s the hours worked. Australians have long ranked amongst the hardest-working nations in the world. But overall, the hours worked has been falling and the trend does not appear to have been reversing. So back when the federal budget was put together, Treasury assumed more hours would be worked than has actually happened.
This means there is less overall economic activity than forecast in the Budget which will have an impact on growth, and the federal budget bottom line. On the other side of the coin, the “output gap”, or a measure of inefficiency that shows the economy is operating at below its full capacity, has fallen a little bit, as shown here:
But Ray also pointed out that as a result of the ageing population, “the economy’s potential growth rate is projected to fall slowly over time, reaching 2½ per cent by 2050.”
The full speech is here.
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