Population growth as an economic driver

More people increase domestic demand while more workers increase output.

Of course, to increase a country’s standard of living, economic growth must grow faster than population growth. There must be productivity growth. This can happen through increased capital intensity, education, and innovation. It is not enough to increase your number of workers, you need to increase the output of each worker. 

As is the case with many advanced economies, Australia’s productivity has been decreasing since the mid-2000s (see chart below) and has even underperformed other advanced countries more recently.

Some critics argue that Australia (and Canada) have fallen into a “population trap”. This is where the number of workers grows faster than capital investment and so productivity declines. However, an OECD report in 2019 found that migrants boost productivity in Australia.

Even if you accept the “population trap” theory, you would expect that capital investment will  catch up to the new workers in the future, and when that happens GDP per worker will surge. The population trap is speaking to an adjustment period rather than an ongoing problem.  

Some also blame the focus on population growth for disappointing advances in innovation, entrepreneurship, and industrial development. Why aren’t there more Atlassians, Cochlears, and Afterpays in Australia? However, this does not have to be an either/or. Australia can benefit from population growth and growth in these other factors. They aren’t mutually exclusive. A balanced approach is needed.

Australia’s population growth stands out

It is no secret that most advanced countries are ageing and in some cases are shrinking - looking at you China, Italy, and Japan. As incomes and education levels have risen, the average number of children per woman has fallen (i.e. the fertility rate).

Australia is no stranger to this trend. Its current fertility rate is below the replacement level of 2.1 children. However, its fertility rate is higher than many comparable countries. More importantly, it has a higher net migration rate. In 2019, the OECD found that Australia had the second-highest share of migrants of OECD members and twice the OECD average.

Together, fertility and net migration makes Australia stand out (see chart below). If this trend continues, Australia’s population will keep growing and by 2050 it will be close to catching up to countries like Poland and Ukraine whose populations are decreasing.

Electoral backlash to post-COVID surge

The pandemic saw net migration plummet to -85,000 (see chart below). However, the post-pandemic rebound has caught the government off guard. In 2021-22, net migration returned to a level similar to the period pre-pandemic. But in 2022-23, net migration surged to a historical high of over 500,000. This has put pressure on the Albanese government which released a review into immigration policies and has promised to return net migration to normal levels over the next two years. 

“We do need to have our migration level brought to a sustainable level,” Anthony Albanese, Prime Minister of Australia.

What about rental vacancies and the ecological toll?

December’s “Chart of the Month” looked at how Australia has among the lowest rental vacancy rates in the world at the moment. Open houses for rental apartments in Sydney and Melbourne have become cut-throat affairs of 100 plus people.

Part of the blame can be attributed to the increasing population. But it doesn't help that the number of short-term visas (predominantly foreign students) have spiked post-covid or that Sydney and Melbourne remain the largest destinations for migrants and foreign real estate investors.

However, the real problem is supply. Not enough houses are being built. At some point, as house and rental prices continue to rise, the market should balance itself. If not the government can intervene with public housing schemes as it has in Australia’s past.