Last month, the RBA acknowledged that falling immigration has held the unemployment rate down.
Today, Assistant Governor Christopher Kent gave an address to the Economic Society of Australia (Qld) Luncheon in which he acknowledged that as population growth has fallen by more than expected, effective employment utilisation has increased, thus lowering unemployment:
…recently released data revealed that population growth, and hence the growth of the labour force, has been a bit lower than we’d assumed. In the face of fewer employment opportunities over recent years, particularly in resource-related industries, there has been a decline in the (net) number of immigrants arriving to seek work. While we’d expect the labour supply to respond to economic conditions in Australia relative to those overseas, the adjustment has been more pronounced than earlier anticipated…
As recently as May, official data suggested that the working-age population had been growing by about 1.7 per cent per annum, and it was expected to continue at about that rate in the foreseeable future. However, the most recent data from the ABS suggest that total population growth had dropped quite noticeably over the past year or so, from 1.8 per cent over 2012 to 1.4 per cent over 2014. Estimates of the working-age population are expected to be revised down accordingly in coming months.
The decline in population growth was mainly the result of a decline in net immigration…
The unexpected slowdown in population growth implies somewhat less rapid growth of our labour force than otherwise. This means that the GDP growth that we have recorded may have been closer to the recent growth in the economy’s productive capacity than previously thought. If so, that would have left the economy with a little less spare capacity (a lower unemployment rate) than had been expected…
The implications of lower population growth for the outlook for spare capacity depends on its effect on aggregate demand and aggregate supply.
Lower population growth implies slightly less growth in aggregate demand for goods and services. At the margin, there will not be as many new residents spending on items for consumption or needing housing. Nor will there be as many new workers that we’d need to equip with capital to do their jobs.
Despite the downward revisions to a number of elements of aggregate demand, the unemployment rate is forecast to be a little lower than previously anticipated. In part, this owes to the slightly better starting point for the unemployment rate than earlier assumed. Also the unemployment rate is forecast to remain little changed from levels of recent months over the course of the rest of this year and next. This is because the change in the growth of aggregate demand is expected to be broadly matched by lower growth of the economy’s productive capacity, which in turn follows from less growth in the labour force…
In particular, we expect the unemployment rate to be little changed from recent levels over the next 18 months or so, before declining in 2017.
All fair enough, except for the RBA’s farcical forecast of lower unemployment in 2017, which is highly unlikely in our view due to the triple hit of:
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cratering mining investment between now and 2017;
the closure of the car industry by 2017; and
the downturn of dwelling construction, most likely from 1H next year.
It’s not as if these events are not well known, so why does the RBA continue to ignore them when compiling its unemployment forecasts?
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
