Migration presents challenges for Australia future growth story

Strong population growth has been key for Australia’s growth, but it may be a while before we get to what it was before, HSBC Australia, New Zealand and Global Commodities, Chief Economist, Paul Bloxham, told a CEDA livestream audience, exploring the economic implications of coronavirus. 

“A lot of what's driven Australia's growth in recent years has been strong population growth driven by migration,” he said. 

“If you look at population growth in the last five years in Australia, it’s been just under two per cent per annum. Over one per cent, almost two thirds, of that has come from inward migration. 

“This is going to present a lot of challenges for our growth story if it turns out that migration stays weak for a considerable period of time.

“I think it's going to look significantly different for quite some time. It could be quite different for a really long time, and that affects…tourism, education exports, it affects international commerce, to a degree. Probably most critically for Australia, it's how it affects migration that's going to be really a critical feature of how to think about where the growth is going to come from – and areas like the housing market and lack of demand for consumer goods.

“That’s going to have broad reaching implications”

Speaking more broadly on the impact of COVID-19 on the economy, Mr Bloxham said HSBC – much like others – is forecasting a sharp contraction in global GDP in the second quarter of this year.

“The basic numbers I’ve been working with, if you add together recreation, hospitality and services exports, that’s 14 per cent of Australia’s GDP. So, pick your number as to how much those things are going to contract, but they’re going to a be a huge drag on Australia’s economy in the second quarter,” he said.

“The team has in mind that hopefully we will be able to contain this and we will start to head back to normal and we’ll get some sort of a V-shape recovery, but I think there is a really considerable risk that actually this thing becomes a more elongated story.

“For Australia one of the key things of course is how China is travelling. The fact that China is back on some sort of recovery path is very helpful for us, the fact that China is probably going to continue to pull the levers domestically and support its economy with infrastructure and investment, that’s continuing to provide support for metal prices, for example iron ore and coal and base metals, so that sector of Australia has got some support.

“We have some benefits…to being a distant island.

“We can control our borders and so one of the benefits Australia may have is that we’ve blocked the borders so we’re not getting anything offshore anymore, and if we can deliver enough containment to essentially get close to eliminating or certainly controlling the spread of COVID-19, we can start to head our economy back to some sort of normal. Even if it turns out that global recovery is sluggish, that a vaccine doesn’t arrive for some time, we can support our domestic economy."

BIS Oxford Economics, Chief Economist, Sarah Hunter, discussed the outlook for Australia, noting the predicted drop in consumer spending and business investment.

“Consumer spending could fall by something like 25 per cent,” she said.

Ms Hunter highlighted that the fall was a combination of factors including social distancing measures and loss of income, particularly for those in the ‘social services sector’ such as restaurants, cafes and entertainment.

“The other major indirect challenge that we are very concerned about is investment, business investment,” she said.

“This is clearly not an environment that businesses want to invest in and we think this is going to show up across the board. So, some construction projects that we might have expected to get underway three to six months ago, we don’t think those are going to get off the ground…at least particularly in some of the sectors that are most exposed.

“It’s also very, very likely that machinery and equipment investment will also take a hit. Again, this is not an environment that firms want to be investing in, expanding capacity in.

“It’s so uncertain. We don’t know what the recovery trajectory is going to look like. At this point in time we don’t really have a clear idea of when recovery takes hold, what the unwinding timetable is for all of these restrictions, what are some of those longer-term implications. So if you’re a business looking at investment right now, this is not an attractive environment.

“We know that from some of the high frequency data that we’re getting through, the confidence indices, the NAB Business Survey…came in much, much worse than the trough of the GFC, so we know that these that these decisions are going to be delayed.

“Businesses are feeling the pinch and are struggling through this of course and that's going to be the further indirect negative on the economy.”

Areas of resilience relative to the rest of the economy Ms Hunter highlighted were resources and the agricultural sector, which leads into food processing and consumption.

Deloitte Access Economics Partner, Nicki Hutley, also spoke for the livestream discussion on the economic implications of coronavirus and explored three questions: what have governments been doing? Will it work? And, how will we pay for it?

“First and foremost, we need to keep coming back to the fact that this is a health crisis and unfortunately the remedy for the health crisis is inducing an economic crisis,” she said.

“Whilst you may think that the measures government has taken aren't perfect, they have done enormously well to get the level of support out in the time that they have.”

The measures include health and civic measures such as travel and movement restrictions; increased testing; household measures including the Jobseeker and Jobkeeper payments; as well as early super access; while we have also seen from the Reserve Bank of Australia, the cash rate cut to 0.25 per cent and quantitative easing.

“We had thought that the unemployment rate would get to 17 per cent at the peak. We now think it's probably closer to 12 per cent because of that Jobkeeper, but a lot depends on how long this goes on for,” she said.

“Everything ultimately comes down to not the economic measures but actually these health measures that are in place, because nothing can happen, and no recovery can take place until we start to get some sort of control over the health issue.”

Speaking on how the government will pay for the stimulus packages, Ms Hutley said this is something Australia can pay for over the long-term.

“The estimates are stacking up. We're talking about, you know, costing around 10 per cent of GDP so increasing our national debt by that amount, that's just the expenditure side,” she said.

“We then have got the revenue side of course, because personal and business revenues and all sorts of revenues will be severely reduced, so we could be looking at getting to net to debt to GDP of maybe 50 per cent.

“That sounds like a lot, but it's actually not when you think about it, so globally averages around 80 per cent. We know that when you get to 90 to 100 per cent that's where it starts to impact your long-term potential growth rates but this is something that Australia can pay for over the long term.”

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