Australia’s economy — already growing at an above-trend rate of 3.1% in the 12 months to March 2016 — could be about to get an additional boost from an oft-overlooked source: population growth.
That’s the view of UBS Australian economics team of Scott Haslem, George Tharenou and Jim Xu, who believe a recent stabilisation in population growth at around 1.4% per annum “is positive news for Australia’s growth outlook”.
To provide some background, UBS has compiled a nifty chart (below) that looks at the composition of Australian population growth over the past four decades, looking specifically at the impact of net overseas migration and natural population increase.
As it clearly demonstrates, the slowdown in population growth over recent years has been largely due to a sharp deceleration in net overseas migration, something that the bank points out has been largely driven by Australians leaving, rather than a drop off in migration from other nations.
80% of that prior slowing in population growth reflects reduced net overseas migration, while the other 20% is due to slower ‘natural increase’. For net overseas migration, this has slowed from 238k to 177k annually between 2012 and 2015 (down 61k, & from 1.0% to 0.7% of the population), while Australia’s ‘natural increase’ has slowed from 163k to 149k between 2012 and 2015 (split relatively evenly between more deaths & less births).
So what has driven this slowing in net overseas migration? Interestingly, it almost entirely reflects more Australian leaving than any fall in permanent migrant arrivals to Australia (Figure 3). Indeed, between 2012 and 2015, annual overseas arrivals have only slowed from 493k to 483k (only 0.04% of population growth), whereas Australian’s migrating overseas have risen from 256k to a record 306k between 2012 & 2015 (a more significant 0.21% of population growth).
So Australians are ditching the country in record numbers, searching for greener pastures elsewhere, it seems. Why then did household consumption expenditure — the largest component of the Australian economy — manage to grow 3.0% year-on-year in the 12 months to March?
While many have speculated — a reduction in the household savings rate just to name one — UBS believes there was another factor that helped to boost consumption levels: the record-breaking influx of international visitors and students studying on our shores.
While the ABS’ measure of population growth includes foreign students studying multi-year degrees, it excludes students doing shorter-term courses of a year or less. Yet, while tourist and business visitors (also excluded from the population measure) would rarely increase the demand for physical housing, appliances, utilities and the like, it is more likely short-term foreign students staying for a 9-10 month study course would. This suggests short-term students, while not truly ‘population’, could have a more significant positive impact on demand for goods and services in the economy, more akin to the resident population.
Coupled with the rapid influx of short-term foreign student numbers, UBS suggests that record-breaking levels of international tourist arrivals is “combining to deliver a faster pace of people on our shores”, helping to support economic activity through increased consumption, higher levels of employment and increased demand for residential housing, among others.
The chart below, supplied by UBS, shows Australian population growth, including short-term net education arrival numbers. Based on its unofficial estimate, UBS suggests that population growth — essentially the number of people in the country at any one period of time — has actually accelerated in recent quarters, rising at around 1.7% per annum in the past 12 months.
Although much of the economic growth seen in the March quarter was due to net exports — largely due to a sharp lift in commodity exports in volume terms — the acceleration in short term visitor arrivals and education migration goes someway to explaining why private consumption levels remained firm despite weak incomes growth and elevated levels of labour market slack over the same period.
Essentially, with more people residing in Australia, it’s helping to assist economic activity and employment growth despite more Australians than ever before migrating overseas.
Indeed, should the recent deceleration in net overseas migration reverse — something that could well occur given the UK has now voted to leave the European Union — it could see population growth reaccelerate, potentially bolstering economic growth further.
UBS is currently forecasting real GDP growth in Australia of 2.7% in 2016, a level that the bank expects to be maintained in calendar year 2017.
Given the mining infrastructure capital expenditure (CAPEX) boom will continue to drag on economic growth over this period, such a solid rate of growth — around trend if UBS are proven correct — would be a remarkable outcome.
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