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Economic and Financial Market Update: Bigger Is Not Necessarily Better (But It Can Help)

02 July 2021

Summary:

Population growth has been a key driver of Australia’s economy for the past few years;
But it has slowed dramatically over the past year, mainly because of lower immigration;
The slowing in population growth has been particularly marked in Victoria;
One trend has been the fall in the number of people leaving regional areas to go to capital cities.
Australia’s population is projected to be lower than previously anticipated.
But history suggests that there is big uncertainty about long-run population forecasts.

In recent years Australia has enjoyed very strong population growth. It has been an important economic driver. The majority of that population growth has been immigration. On average immigrants have a lower age than the average Australian (37). This has meant that an aging population has been a less pressing issue over the past decade.

Unsurprisingly given the national story, population growth was low in all states and territories. Overall, growth was strongest in Queensland and WA, and very weak in Victoria. WA and Queensland benefitted last year from inter-state migration. NSW typically suffers from an outflow to the other states. But this was not the case last year.

The very strong population growth in Victoria over recent years led to Melbourne becoming the most populous city in Australia by mid-2020. But given what happened last year, Sydney is likely to reclaim the crown as being Australia’s most populous city next year.

The general narrative is that over the past year there has been a trend of people leaving cities to go to regional areas. The actual story is more complicated. For example, Sydney experienced a big fall in the number of people arriving from interstate but there was an even bigger decline in the number of people leaving Sydney to go to other states. There was also an increase in the number of people leaving Sydney to go to other parts of NSW. But the even bigger shift was that there was less people from regional NSW moving to Sydney.

A resumption of immigration growth back to pre-COVID rates will be necessary to achieve a stronger economy. More important will be a return to higher productivity growth. Here there are good signs, not the least the current massive increase in capex spending by firms.