The latest Overseas Arrivals and Departures data for the month of June 2015 confirmed that population growth in Australia will be once again be slower in this calendar year.
As I argued a year ago, by the third quarter of 2014 it had become evident that the assumption reported widely in the media that the population of Australia would boom by around 2.4 million persons over the next six years was too high – much too high, in fact!
In the event population growth slowed considerably to be up by an estimated +330,200 in 2014, and population growth will be slower again in 2015.
Over the longer term we might indeed expect to see much stronger levels of population growth return for the reasons I explored here, but for the foreseeable future lower population growth will be the new norm.
Let’s take a look at the implications of the latest figures in three parts.
Part (i) – Slowing immigration nationally
The number of long term arrivals into Australia has slowed further over the past year, and consequently net long term migration has pulled back to +292,000 on a rolling annual basis, sliding from a recent peak of more than +400,000.
This suggests that population growth in 2015 will likely slow further perhaps to around +300,000 persons from +330,200 in 2014.
One of several key potential drivers of this trend has been the sharp reduction in the number of permanent settlers from New Zealand.
Meanwhile the number of permanent settler Brits has slowed to a mere trickle – just 470 settlers in June hailed from the United Kingdom, the lowest monthly figure across the full 25 years of available data.
Kiwi citizens can move freely between Australia and “home” and as such are theoretically far more sensitive to shifts in labour market conditions.
And while spare capacity in the labour market has being rising over the past three years in Australia, it had been tightening for some time in New Zealand.
With mining construction activity now slowing sharply in Australia – and Christchurch in New Zealand seeing a high volume of reconstruction activity – it is perhaps unsurprising that fewer New Zealanders are making the trans-Tasman trip on a permanent footing (although a record 1.27 million still came to Australian shores on a short-term basis over the past year).
On the other hand the number of settlers from countries such as China and India continues to slowly but surely break new heights.
Indeed, the overwhelming majority of settlers in Australia now hail from Asia, with the middle east the only other region or continent presently in a confirmed uptrend.
Part (ii) – Record visitors to Australia
There is a flip side to the softer pace of growth in Australia’s economy, and that is that falling interest rates and a correspondingly weakening currency have encouraged the tourism sector to attract a record number of short term arrivals Down Under.
This year the rolling annual number of short term arrivals blasted past 7 million for the first time to a record 7.12 million in the 2015 financial year (denoted by the blue line below).
While the corresponding drag on overseas travel by Australians has only been fairly gradual to date (denoted by the red line above), the weaker dollar also means that over time comparatively fewer Aussies will be inclined to make overseas trips, which in turn will act as a further boost for the domestic economy.
I holidayed on the Sunshine Coast myself in the past week, and it is quite evident that more Aussies are inclined to hang out in locations such as Noosa over the winter than has been the case in recent years.
After all, travelling overseas is not quite as much fun as when the dollar was at sky high levels just a few years ago!
Accordingly the ratio of short term departures to short term arrivals has steadily been trending down for the past two years.
One trend which is definitely not slowing down is the number of Chinese visitors to Australia with more than 1.25 million visitors from China, Taiwan and Hong Kong over the past 12 months, with the latest figures showing no signs of this emerging mega-trend easing off.
A record 563,800 Americans have also enjoyed the dramatic shift in the exchange rate over the past year.
Furthermore there has been an explosion in the number of foreign students in Australia – also largely hailing from Asia – another trend which has in part been driven by exchange rate movements.
This is an emerging demographic trend which will impact Sydney and Melbourne most keenly.
The full impact of the depreciation of Australia’s currency has yet to flow through to this data and we will certainly now see further short visitor records broken in the year ahead.
Part (iii) – 3 implications of lower population growth
So what are the impacts of slower population growth in Australia, which could continue for the foreseeable future?
There will be many impacts, of course, but here are just three of the most prominent observations.
Firstly, and most obviously, slower population growth will equate to lower demand for goods and services, which in turn over time should result in lower economic and employment growth.
Over the next few years there will be a lower than expected requirement for investment in building offices, warehouses, housing, machinery, plant and equipment.
Secondly, with employment growth having tracked at an estimated 2.1 per cent or 243,600 new jobs over the past year – which is considerably faster than the estimated rate of population growth of just 1.4 per cent – the Reserve Bank now believes that the unemployment rate has likely peaked for this cycle.
Previously it had been forecast that the unemployment rate would continue rising to around 6.5 per cent, but now the unemployment rate is seen as more likely to be falling again from 2017. The darker blue shaded areas represent the Reserve’s 70 per cent confidence interval.
However, there are many regions in Australia where unemployment is still elevated or rising, particularly in resources-influenced regions and in South Australia where the trend rate of unemployment has hit 7.9 per cent and rising.
Thirdly, with the mining investment supernova now set to implode in spectacular style, the strong rates of immigration which benefited the resources areas of regional Western Australia and regional Queensland have now ebbed away.
Accordingly population growth has become more capital city focused.
The most recently available data showed that Greater Melbourne and Greater Sydney alone accounted for all but half of Australia’s total population growth, while Greater Brisbane and Greater Perth accounted combined for close to nearly a quarter of the total.
Regional population growth on the other hand has in aggregate been been slow and slowing.
As for whether the mining boom will have a second wind? Highly unlikely: that’s not the way that commodity cycles typically tend to work.
The Reserve Bank’s Commodity Index was once again smoked by another 5 per cent on a monthly average basis in SDR terms in July to be a punishing 20.2 per cent lower over the past year.
In Aussie dollar terms the decline has been a somewhat less dramatic 8.5 per cent year-on-year, but nevertheless Australia’s terms of trade (TOT) remain well above their long run average (and TOT booms have historically tended to over-shoot on the downside too).
Note that it’s not just iron ore and coal prices which have been hammered as demand from China and elsewhere has slowed in the face of a glut of supply.
Oil, aluminium, copper and gold have all hit half decade lows in recent times, while the price of silver has tracked little better.
Slightly bizarrely – given that coal prices are well below the project’s notional break even point – the Adani Carmichael Mine is one possible exception to the accelerating decline in mining investment.
Some folk with the power to exert material influence evidently has the government’s ear relating to this essentially unviable mega-project.
Generally speaking, however, mining production is ramping up, there is heavy downward pressure on commodity prices, and ever fewer material projects have been passing viability.
Going forward population growth in Australia will follow the employment growth, which has been heavily focused on Sydney and Melbourne, and to a somewhat lesser extent Brisbane and the Gold Coast.
Indeed, over the past year more than 80 per cent of employment growth has been found in New South Wales and Victoria, and overwhelmingly in Sydney and Melbourne.
With the Western Australian economy slowing and net interstate migration going into reverse gear, population growth will is likely to be heavily focused on the three largest capital cities – a trend which will only be exacerbated by the nascent explosion in foreign students.
The Reserve Bank added its own outlook for the housing market in the latest SOMP:
“Supply constraints, particularly in Sydney, may limit the extent to which new dwelling investment can satisfy growing demand, which raises the possibility that housing prices will grow more quickly than forecast.
Also, housing prices outside Sydney and Melbourne are little changed over the past year or so and may not yet have responded fully to the very low levels of interest rates.”
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