Australia’s population is booming

Australia’s population is booming

Australia is experiencing a population and demographic transformation, with nearly 50 per cent of our population able to claim at least one parent born overseas. George Tharenou of UBS analysed the implications in his recent report entitled “How will a ‘Big Australia’ impact the economy and the ‘intergenerational contract’?” The report dives deep into the effects of Australia’s population boom on the economy, asset prices, productivity, housing, and superannuation.

An unprecedented surge

Tharenou notes Australia’s population growth stands out globally, with its population doubling over the last 50 years to reach 26.5 million in early 2023. This growth has been fuelled equally by natural increases and migration. However, recent trends indicate that migration is set to play an even larger role, with the government reporting migration spikes beyond projections. In Q1 of 2023 alone, migration jumped by a record-breaking 454,000 people, contributing to a population growth rate of 2.5 per cent annually – the fastest in over 50 years.

Young and diverse

The median age in Australia is currently 37.9 years, notably younger than the Organisation for Economic Co-operation and Development (OECD) average. Thanks to migration, this youthful demographic is expected to persist, slowing the aging of the population. Most new migrants are significantly younger, with a median age of 27, adding further to the economic workforce and stabilizing the future age distribution.

By 2050, while Australia’s median age will rise to 41.8, Tharenou reports this will still be five years younger than the OECD average. Indeed, according to the UBS analyst, migration is projected to slow the population’s aging significantly, keeping Australia in a favourable demographic position compared to other advanced economies.

Housing

UBS’s report highlights that fast population growth will likely exacerbate the existing housing shortage. The demand for housing will continue to increase, especially as migrants typically settle in urban centres like Sydney and Melbourne. Meanwhile, the housing supply remains weak, with residential building approvals tracking near-decade lows. We have reported this frequently on the blog.

According to Tharenou, the residential rental vacancy rate is at a record low of around one per cent, which has already driven rents and property prices higher. UBS forecasts this undersupply is structural, projecting rents and housing prices will increase by 4-5 per cent annually over the next decade.

Inflation

Tharenou notes the influx of migrants is expected to have mixed effects on inflation. In the short term, increased demand may contribute to higher consumer price index (CPI) figures, and UBS estimates it could add between 0.25 per cent and 0.5 per cent to annual inflation. The report estimates that inflation will average 3.2 per cent over the 2020s, with the potential for a “higher-for-longer” interest rate environment to control inflationary pressures.

However, in the medium to long term, the labour supply growth provided by migration is expected to ease wage pressures, making migration a disinflationary force. If managed effectively, this could mitigate some of the inflationary impacts of housing shortages and consumer demand.

Superannuation

In something that will no doubt be reported more widely, Tharenou notes Australia’s mandatory superannuation system is expected to experience exponential growth, driven by strong population growth and rising asset prices. According to the report, superannuation balances are forecast to surge from $3 trillion today to an astonishing $33 trillion by 2062, representing around 218 per cent of gross domestic product (GDP) by that time.

This massive pool of retirement savings will support asset prices and provide a growing income stream for retirees. The report notes that superannuation benefits are already boosting household incomes, particularly for older Australians, with payments increasing by 20 per cent year-on-year in 2022-23, amounting to over eight per cent of household disposable income.

Productivity

Despite strong population growth, UBS projects a concerning outlook for productivity, noting the Australian Government’s 2023 Intergenerational Report (IGR) downgraded long-term productivity growth estimates to 1.2 per cent, down from 1.5 per cent. UBS is even more pessimistic, forecasting productivity growth of just 0.6 per cent per year for the rest of the decade, a record low for Australia.

This productivity stagnation could weigh on real GDP growth, which UBS projects will moderate to 2.1 per cent annually throughout the 2020s, lower than the IGR’s estimate of 2.4 per cent. However, nominal GDP growth is expected to remain robust at 5.3 per cent, due in part to inflation.

Fiscal Implications

According to Tharenou, the Australian Government is expected to benefit from strong migration. A growing labour force and skilled migration are key contributors to a healthy fiscal outlook. The federal budget recently posted a $22 billion surplus, representing 0.9 per cent of GDP, far exceeding expectations and outperforming other major economies that are running large deficits.

However, state governments may face more significant challenges. With a rapidly growing population, states will need to invest heavily in infrastructure, particularly in construction and transportation, to keep up with demand. This could create inflationary pressures in these sectors, making it harder for state budgets to balance as they race to accommodate the booming population.

I would note that if infrastructure construction continues to corner skilled trades, the lower supply of labour for residential construction increases its cost and will outpace inflation generally, causing the price of existing houses to rise even faster than might otherwise be predicted. If the government want to avoid this, the work they are doing to change the contract with unions is even more urgent.

An intergenerational divide

UBS’s report also touches on the broader implications for the ‘intergenerational contract.’ While the booming population will support asset prices and economic growth, there is concern about the widening wealth gap between older and younger Australians.

Older Australians, particularly those over 55, currently hold a disproportionately large share of household assets – 54 per cent of total assets but only 23 per cent of liabilities.

Meanwhile, younger Australians are facing rising debt levels and higher interest rates, creating financial strain. As the population continues to age, superannuation benefits are expected to continue flowing to older households, further enhancing their wealth, while younger households struggle with housing affordability and debt.

This bifurcation in household wealth and income could have far-reaching social and economic consequences, particularly as younger generations grapple with stagnant wages and higher costs of living.

Risks

While UBS remains optimistic about Australia’s population trajectory, they caution that a change in government policy or unexpected economic shocks could slow migration. A sustained housing affordability crisis, persistent inflation, or higher unemployment could prompt policymakers to introduce measures to curb migration, which would disrupt the current projections.

Business is understandably supportive of a rising population, so in what might hint at a bit of self-interest or perhaps on behalf of the bank’s clients, the UBS report warns slowing immigration would have significant economic consequences, including lower GDP growth, increased budget deficits, and a slower expansion of the superannuation pool.