RBA governor Philip Lowe used a key speech to argue strong population growth is good for Australia

(Lisa Maree Williams / Getty Images)
  • RBA governor Philip Lowe set out the economic benefits of Australia’s rapid rate of population growth in a key speech today.
  • Lowe said that increased immigration makes Australia younger, and “has also boosted the nation’s human capital”.
  • He also added some extra details around the RBA’s inflation projections, following yesterday’s interest rate announcement, and reiterated the bank’s long-held position that the next move in interest rates is likely to be up rather than down.

RBA Governor Philip Lowe says strong population growth helps improve Australia’s age demographics and supports economic growth.

In speech called “Demographic change and recent monetary policy” at the Anika Foundation lunch in Sydney, Lowe also reiterated his assertion that the next move on interest rate is likely to be up.

The speech, in a tradition established by Lowe’s predecessor Glenn Stevens, is one of the most anticipated and free-ranging discussions each year by the country’s top central banker, often canvassing cultural issues as much as the economy.

Population growth

With immigration policy and the level of migrant intake returning to the political agenda over recent months, Lowe outlined why he sees strong migration as a positive, while acknowledging Australia’s rate of population growth is comparatively high by international standards.

Australia’s population officially ticked above 25 million last night. Over the last decade it’s risen by 1.5% per year, compared to an average of around 1% for other developed countries. And Lowe noted the pressure that has put on the country’s infrastructure.

“As a country, we were slow to increase investment in infrastructure to meet the needs of our more rapidly growing population,” Lowe said.

“This slow adjustment is one of the factors that contributed to the large increases in housing prices in some of our cities over recent times.”

The RBA boss said there were also a number of benefits from high immigration levels. For one: it keep the country young.

“The median age of new migrants is between 20 and 25, which is more than 10 years younger than the median age of the resident population,” he said.

Source: RBA

There are currently more than 500,000 overseas students studying in Australia, and around one sixth of those generally stay on to live and work here.

This, Lowe said, “has also boosted the nation’s human capital. People living in Australia who were born overseas are more likely than the average Australian to have a post-secondary school qualification”.

In addition, the average age of an Australian in 2040 is now expected to be 40, down from a projected age of 45 in 2002.

Lowe said Australia’s median age is currently 37, but we are ageing more slowly than other advanced economies, with higher fertility rates and long life expediencies.

“The movement to Australia of large numbers of young people over the past decade has changed our demographic profile in a positive way,” Lowe said. “So, in summary, we are better placed than many other countries.”

Constructive adjustment

Despite Australia’s relative youth, the share of working-age 15-64 year-olds as a percentage of the population is in decline.

Lowe said this could cause create a negative drag on productivity, all else being equal.

“But all is not equal,” Lowe said.

“We are seeing shifts in behaviour that have, to date, more than offset the effects of ageing on labour supply.”

The main shift is that those aged 55 or older are working more.

Source: RBA

Lowe cited Australia’s high health rates among older demographics as one factor contributing this trend, while the country’s shift towards service industries which are less physically demanding has also allowed higher participation rates from older female workers.

“The overall picture is one of constructive adjustment to our changing demographics,” he said.

“As our population continues to age, further adjustment is likely to be needed. But as I spoke about earlier, Australia is better placed to deal with population ageing than most other advanced economies.”

Monetary policy

Following yesterday’s interest rate announcement, Lowe provided some extra details regarding the banks revisions to its forecasts for inflation and the unemployment rate.

The RBA said it now expects inflation for the September quarter this year to rise by just 1.75%, down from 2% — a revision JP Morgan called “large“.

“Electricity prices in some cities have declined recently after earlier large increases, and changes in government policy are likely to result in a decline in child care prices as recorded in the CPI,” Lowe said today.

“There have also been changes to some state government programs that are expected to lead to lower measured prices for some services.”

Beyond that, Lowe said he expects inflation to rise to 2.5% by 2020. The RBA’s most recent economic forecasts in May had inflation returning to 2.25% by June 2020.

Elsewhere, Lowe maintained his view that the labour market is tightening, which will eventually lead to a pickup in both wage growth and inflation.

Source: RBA

He added that the ongoing slowdown in Australia’s housing market was reducing financial stability risk, and is “broadly moving in the right direction”.

“It is helpful that this change is taking place at a time when the world economy is growing strongly, the unemployment rate is trending lower and the economy is recording good growth,” he said.

So in summary, Lowe retains the view that Australia will be able to weather a housing downturn while maintaining its growth rate of around 3% per year through to 2020.

“If this is how things evolve, you could expect the next move in interest rates to be up, not down,” he said.

However, as usual, Lowe said the transition was still expected to be gradual, and made it clear the RBA is comfortable keeping rates on hold for the foreseeable future.

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