Population growth juices Australian GDP

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By Leith van Onselen

Yesterday, Prime Minister Kevin Rudd attempted to highlight the Government’s economic credentials by stating that Australia’s economy had grown by a solid 15% since Labor was elected in late-2007:

“As of this year, since we came to office in 2007, the Australian economy is 15 per cent bigger than it was,” he said.

“I draw to your attention the fact that the British economy has shrunk 3 per cent over that time.

“Therefore, the economic credentials of this nation run by this Government over this period of time are strong.”

Factually, Prime Minister Rudd is correct. Australian GDP is indeed 15% bigger than it was when the ALP were elected. It’s growth has also exceeded most other advanced economies, due largely to Australia being a chief beneficiary of the China-led mining boom.

While Australia’s economic growth has indeed been exemplary when compared against most other nations, the 15% growth rate quoted by Prime Minister Rudd does also flatter Australia’s economic performance.

Since the mid-2000s, Australia’s rate of population growth has surged, from an average annual rate of 1.3% in the five years to December 2007 to 1.7% in the five years to December 2012 (see next chart).

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Due to this stronger population growth, the rate of GDP growth per capita has been sluggish since the Rudd Government was elected, growing by only 4.5% over that time period (the vertical black line below represents the Rudd Government’s 2007 election victory):

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Australia’s recovery from the Global Financial Crisis (GFC) slowdown has also been weaker than the past three recessions, when measured on a per capita basis. According to the ABS’ trend measure, Australia’s GDP per capita is only 3.8% above its pre-GFC level (June 2008). This rate of recovery is well below that of the mid-1970s, early-1980s, and early-1990s recessions at the same point in the cycle (see next chart).

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However, a big saving grace this time around is that per capita national disposable income (NDI) growth has been relatively strong, due to the rise in commodity prices and Australia’s terms-of-trade, which has more than offset the weakness in per capita GDP (see next chart – note the ABS does not provide data for the 1970s and 1980s recessions). The downside, of course, is that any downward shift in commodity prices going forward will detract from national income.

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Despite the recent weak rate of growth in GDP per capita, Australia has still managed to outperform most other developed nations, whose per capita GDP has outright contracted in the years following the GFC (see next chart).

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In this regard, Australia is still the “lucky country” even if measured only against other’s poor fortune.

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Comments

  1. All true, Leith, but how much longer can overseas debt continue to sustain it? What proportion of GDP is now consumed by overseas debt, public and private, and how much of it is funding growth-enabling investment?

    Seems to me that is the problem with other developed nations – the interest bill is consuming any productivity improvements they make, and then some.

    • Surely right now is a pretty good time for borrowings to fund the building of productivity-boosting investments.

      – current public debt is not high
      – and the price of debt (interest) is very low
      – and the economy needs a boost.

      • Arrow,

        Thankfully the appetite to borrow more to add to existing Govt Debt is not going to be there with a change of Govt. What we need to do therefore is not borrow more but direct existing Govt spending away from worthless or wasteful items and towards the productive asset building type of expenditures.

        The NBN is a classice example of how incompetence can waste Billions of dollars which should have been productively applied elsewhere. With proper process and contractual oversight there are Billions to be saved in that one project alone. We really do need to take the emotion and politics out of the management of big projects and put auditors and accountants back where they do their best work- saving taxpayer dollars.

      • GSM, are you sure you understand the difference between the plans of political parties regarding NBN and other alternatives? There are many other wasteful programs, but Australia is too far behind Europe or USA in regards to speed and IT services and prices of cause.

      • Arrow

        Public debt does not exist in a monetary or fiscal vacuum. It IS a part of the total national debt. As a result of explosive private debt under Howard (Note the RBA is guilty in this as well) followed by the continued rise of both private and public debt under Labor our total debt situation is quite extreme.
        This is all in spite of our having sold off most of our mines, remaining industry, and now our farms to foreign buyers.

        Productivity boosting investments? I’ve heard two possibilities of all the hundreds that have so far been put forward and I reckon I can guarantee you that those two will never see the light of day because of both false economic assessment criteria and political considerations.

      • Thanks Flawse. I understand the point that private debt is very high.

        Could you explain why that means funding productivity-boosting investments using public debt (at a time of low interest rates and economic weakness) is a bad idea?

        (I’m not saying either political party is necessarily going to make those investments. But I want to know why private debt matters here?).

      • That was more or less my point. We are at the stage where it is manageable now. If it is managed sensibly, we can avoid the fate of other developed nations. That means government debt only for productive stuff, not government debt for recurrent expenditure. The quality of spending is even more important than the quantum. Of course, that applies to state and local government spending as well.

        If as a nation we decide government spending on recurrent items must rise, eg because of an aging population or to fund a national disability scheme or better education or whatever, we need to fund it with higher taxes and lower personal spending. Getting into debt for these items is the road to perdition.

        Good luck to the politicians trying to sell that message, though.

      • And where is the account for the private debt, which can very easily be transformed in public debt? Spain didn’t have public debt until it got it in exactly this way.

  2. When you talk about population growth is that from locals having more children, or is that from foreigners moving here. To me population growth sounds alarms for property and making even more of the bottom end of Australia homeless in the long run.

  3. At last, an article which distinguishes between GDP and GDPPC. The major parties have been boosting their GDP numbers for years by simply importing more people. Whether this is economically beneficial is open to question, given the billions we now need to spend on infrastructure to catch up with population growth.

    There is a better way to set the migration rate. Let the people decide through the census whether they want more, the same or fewer people in their local area. Prohibit development in that area if it would raise the population above the limit the people have set. Add up the total of the local decisions, and you have the best guide to whether or not Australians really want a Big Australia.

    This We Will Decide policy would link migration levels with local development for the first time. Areas which want growth and development would get it; areas which want to remain the same could choose to do so. Anyone interested should look at http://www.wewilldecide.info. The media won’t bother to report it.