These 99 words from the RBA signal a potentially huge change in policy


A few years back RBA governor Glenn Stevens gave a speech highlighting the need for productivity growth because as population growth slowed it would inevitably cause overall economic growth to slow.

It is a theme he returned to recently in his Anika foundation speech when he firmly hit the brakes on Australia’s potential economic growth rate.

It is also a theme that the RBA has now further drawn out in Box D of its quarterly Statement on Monetary Policy (SoMP) released this morning.

The RBA said Australia’s population had grown rapidly over the past decade, “both by the standards of recent decades and in comparison with other advanced economies.”

But that is changing, and population growth has slowed.

“The estimated resident population grew by 1.4  per cent over 2014, down from the recent peak in growth of 1.8 per cent over 2012 and average annual growth of 1.7 per cent since 2006,” the RBA said.

Most of the change is coming from a drop off of net migration with the latest migration numbers lower than the Department of Immigration and Border Protection had forecast. That meant, “population growth over 2014 was around ¼ percentage point less than had been assumed in the Bank’s economic forecasts a year ago,” the bank said.

Stay with me, I know it’s getting dry. But, here’s the rub.

Lower population growth has important implications for the economy. It lowers the growth in demand for goods and services, as well as the economy’s capacity to supply those goods and services. On the demand side, lower population growth would, all else being equal, be associated with less growth in consumption. Over time, it may also reduce the need to expand the capital stock through investment in residential housing, non-residential buildings, machinery & equipment and so forth. At the same time, lower population growth implies that there are fewer individuals available to be employed in producing goods and providing services.

What that statement means is that if population growth is going to be lower in the future then there is less spare capacity for lower RBA interest rates to stimulate. That means further rate cuts are less likely given current conditions. The flip side is it also implies overheating, and the need to increase interest rates is a lower hurdle than previously thought.

These 99 words the RBA has written to explain the impact of population growth on the economy are probably the most important words it has written in a long time. That’s because they have important implications for monetary policy, the RBA’s one blunt instrument to get the economy moving faster or slower.

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