Australian economic update.

Strong population growth continues to boost Australia’s aggregate growth rates which paint a more positive picture on the economy than what most households are experiencing.

Overview

In October last year we published a note looking at the Australian economy on a per capita basis. Our intention was to better understand how economic developments were affecting household living standards. At the time we felt that policymakers were placing too much emphasis on aggregate growth rates and not enough on per capita measures. When we drilled down to the household level we found that the news was more sobering than the headline growth numbers implied.

As we discussed at the time, most economic commentary in Australia focuses on aggregate growth rates which are heavily influenced by population growth ‑ more people means more spending. But if we want to measure changes in living standards, which ultimately matters most to households, then we need to look at how the economy is going on a per capita basis rather than just reporting and focusing on measures of aggregate demand.

Australia’s population growth rate is significantly higher than most other OECD countries. Australia’s population grew by a strong 1.55% (i.e. 373k) in 2016. Net overseas migration accounted for 56% of that increase. A high population growth rate means that making comparisons of economic performance between Australia and other OECD countries using aggregate growth rates like GDP can be misleading. As Governor Philip Lowe recently said, “our strong population growth has flattered our headline growth figures.”

In this note we update and expand on our previous work looking at the Australian economy on a per capita basis. The evidence continues to suggest that policymakers should focus on reforms that boost productivity and raise living standards rather than measures designed to simply raise headline GDP. We think that better outcomes will be achieved for households if a greater emphasis is placed on measures of living standards rather than aggregate growth rates. This note discusses a few of the measures that we consider to be important.

Read the full report.

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The 5.4% rise in total credit over the year is low by historic standards. But Australia’s stock of private debt is still growing faster than nominal GDP which means overall leverage in the economy is rising. The increase in leverage is being driven mainly by the household sector. And the debt is going into bricks and mortar.

Housing credit has been expanding by around 0.5% a month over the past six months. But the annual growth rate has been falling over that period. The stock of housing credit was growing at 6.4%pa in September. It looks like it will stabilise around this level over the near term.

Despite the annual growth rate of housing credit cooling, the pace of growth is still well above national income growth. This means that the household debt‑to‑income ratio is rising. It is currently at a record high and puts Australia in the top tier of household indebtedness globally. As the RBA noted in its October Financial Stability Review, “household indebtedness continues to drift up and, with incomes growing more slowly than in the previous decade, households may not be able to rely on income growth to make their debt easier to service.”

Credit to owner‑occupiers grew by 0.5% in September and is up 7.3% through the year. The stock of debt to investors rose by a slightly higher 0.6% over the month and annual growth lifted a little to 4.8%. Investor credit growth has been accelerating month on month for the past six months which is consistent with other indicators of activity in the housing market. The lift in investor‑related credit shows that the May and August rate cuts had a stimulatory impact on the housing market.

Business credit growth has been limp over the past five months after accelerating earlier in the year. The trend in business credit is a little concerning because it suggests that non‑mining private capex is likely to be soft over the near term. Fortunately public capex is starting to lift after falling as a share of GDP for most of the past six years. This will need to continue to support aggregate demand if private investment is going to remain soft.

The “deleveraging” in other personal credit continues. Personal credit is down 1.3% over the year and reflects the lack of appetite for consumer debt outside of housing.

Broad money was flat over September and stands 5.8% higher through the year.

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The big picture

Australia’s population is estimated to have clocked 24 million during the March quarter. The annual growth rate has been tracking around 1.4% for the past six quarters. It is quite a bit lower than the pre‑GFC boom years when population growth was running around 2.0%pa. But it remains high by OECD standards and is considered to be a strong pace.

Robust population growth means the economy needs to be expanding at a faster rate than otherwise to achieve full employment. That of course means that the economy has the capacity to expand at a faster rate too. The slowdown in Australia’s population growth rate is a contributing factor to why most estimates of trend growth for the economy have been lowered in recent years – both Treasury and the RBA have lowered their estimates of trend growth to be in 2¾‑3% range. In the short run, however, the economy can expand above that pace because; (i) the unemployment rate is above the non‑accelerating inflation rate of unemployment (NAIRU) and can move lower; and (ii) productivity in the resources sector will continue to lift as production comes on stream.

The major driver behind Australia’s population growth continues to be net overseas migration (NOM). However, its contribution to growth has come down over the past few years. Both sides of federal politics favour high levels of immigration to partially offset some of the effects from the ageing of the population. It also allows the economy to grow at a faster rate than would otherwise be the case which boosts aggregate demand. And it has significantly boosted demand for housing which flows through to higher prices.

The ‘grey army’ – those aged 65 and over – has continued to grow as a share of Australia’s population. The growth of this age cohort underpins the structural decline in labour force participation. The ageing of the population has increased the dependency ratio (the age‑to‑population ratio of those typically not in the labour force) which underpins the need for fiscal reform, particularly tax policy.

The detail

Australia’s population is estimated to have risen by 328k in QI (+0.4%). The lift takes the population to 24.1 million as at March 2016. NOM was 181k in the year to March 2016, up from 177k in the year to March 2015. But well down from the peak of 315k in 2008.

Population growth is well above the national rate in Victoria. This underpins very strong employment growth in the Garden State, robust residential construction and strong State Final Demand (SFD). It does little for per capita SFD growth, however. The decline in mining investment and associated downturn in mining‑related employment has contributed to a sharp slowdown in WA’s population growth rate.

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