The effect of population growth on real GDP is starting to diminish and, in the absence of stronger productivity growth, points to lower potential growth.

The Australian economy continues to be underpinned by solid population growth, which remains elevated by international standards, but it has eased considerably over the past year as a source of growth. The end of the mining boom, combined with weaker economic prospects, has made Australia a less attractive destination for immigrants.

The Australian population rose by 1.4 per cent over the year to the December quarter, reflecting strong growth along the east coast, but annual growth has eased to its slowest pace in 3½ years. If this recent trend continues, annual population growth next quarter will moderate to its slowest pace in around a decade.

Population growth has eased across most states, although nowhere is this slowdown more pronounced than out west. Annual population growth in Western Australia eased to 1.6 per cent, which is strong relative to other states but a long way off its peak.

Growth continues to be rapid in Victoria (up 1.8 per cent over the year), while growth has eased towards more normal levels in New South Wales (up 1.4 per cent). Population growth in South Australia and Tasmania remains weak.

Economic opportunity is one of the leading factors behind population growth. This helps to explain, for example, the relative strength of Western Australia and Queensland over the past decade. The number of opportunities (particularly for low-skilled workers) made these states an attractive location for new immigrants and domestic residents alike.

Other states, such as New South Wales and Victoria, benefit from a combination of job opportunities across a wide variety of occupations and the appeal of big city living.

But population growth can be a double-edged sword. Strong growth may be short-sighted unless our state and federal governments pay attention to our existing infrastructure and natural resources. On the other hand, low population growth may also be problematic if it limits market size and economies of scale.

Attracting capital investment to states with soft population growth can be difficult, particularly in states such as South Australia and Tasmania, which already have a low population to begin with. I’d argue that population growth in the likes of Victoria is far too strong, but South Australia and Tasmania need to do more to attract more people.

Overall, immigration remains the main driver of Australia’s population growth, accounting for around 55 per cent of growth over the past year. But the rate of natural increase, defined as the difference between births and deaths, is also elevated by historical standards.

Net migration appears set to fall further in the near-term and provide less support to economic growth. The ratio between long-term arrivals and departures — effectively net migration — has fallen to its lowest level in 3½ years.

Population growth in this data release is estimated at 0.2 percentage points weaker than those contained in the national accounts. The two measures track each other fairly closely over time and — by virtue of being the less timely measure — I expect that population growth in the national accounts will be downgraded to better reflect those in the demographics data.

The data indicates that one of the central pillars of Australia’s recent success — rapid population growth — is less potent than it has been over the past few years. The effect of population growth on real GDP is starting to diminish and, in the absence of stronger productivity growth, points to lower potential growth.

Most analysts maintain that Australia can grow at around 3.25 per cent without a breakout in wages and inflation. But with our population growth rising at just 1.4 per cent annually, these estimates require real GDP per capita growth of a magnitude that we haven’t been able to achieve consistently for over a decade. Instead, a figure closer to 2.75 per cent may be more appropriate and even 2.5 per cent could be closer to the mark.

RPDATA

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