THE BIG PICTURE: Australia’s looming population problem

One of the sleeper issues at present is population growth. The latest data showed that Australia’s population grew by 1.6% in the year to September, the slowest growth rate in four years and well down from the peak growth (40-year high) of 2.2% in December 2008.

Slower immigration is the culprit here, not the number of babies being born, and largely due to Government policy.

Those in favour of a ‘small Australia’ would conclude that the slowdown in population growth is a favourable development. But they may not hold those views next time interest rates go up, especially if the Reserve Bank singles out the tight job market as one of the prime drivers behind the decision. Because the strong global demand for our resources and demographics both indicate that demand for labour will remain strong in coming years. The challenge for Australia is to ensure that labour supply lifts to meet that higher demand. If it doesn’t, then the one thing that economics shows is that something has to give – and most likely that means higher wages, and potentially higher prices.

As noted by Professor Peter McDonald, one of the best demographers in Australia, “barring a major downturn in the world economy, labour demand is likely to remain very strong into the future.” McDonald argues that there needs to be urgent action on skills development, the need for significant growth in public infrastructure, and a “planned, well-managed immigration program.”

McDonald notes that the Government’s permanent migration program and domestic sources of workers have been insufficient to meet the strong demand for labour so the gap has been filled by temporary migrants.

The question is whether this is a desirable or sustainable situation. But whatever is eventually decided by policymakers, the simple fact is that the Government must ensure that an efficient, streamlined system is in place so that businesses can get the staff they need. Supply of labour has to lift to meet strong demand otherwise the consequences will be higher inflation, slower economic growth or both.

The other point by McDonald is that “substantial future population growth” over the coming decade is embedded in the economy. The higher population growth must be planned for, especially in terms of infrastructure demands.

The week ahead

A busy week lies ahead with a speech by the Reserve Bank Governor probably the stand-out. Meanwhile there is a bevy of ‘top-shelf’ economic indicators for release in the US and the latest monthly readings on the Chinese economy will be released on Friday.

On Thursday morning Australian time (Wednesday lunch-time in New York) the Reserve Bank Governor will deliver a speech simply titled “Economic Conditions.” Clearly the RBA Governor will have a broad canvas to paint on, but it will be a timely update of the latest views on the economy. No doubt businesses have been giving RBA liaison officers fairly down-beat views on the economy. The question is whether the Governor will remain upbeat about 2011/12.

In terms of economic data, most eyes will be on the NAB business survey on Tuesday and the consumer sentiment report on Wednesday. While the business sector is generally finding life difficult at present, it still is largely positive about the future. And consumer confidence may have improved a tad, but nothing too dramatic. People still haven’t got the sense that things are back to ‘normal’.

In terms of the other economic indicators, data on lending finance kicks off the week on Monday. Consumers and businesses are more inclined to save, rather than spend, but there has been a modest pick-up in new lending in the past few months that deserves to be monitored.

On Wednesday, the Bureau of Statistics and Federal Treasury will publish the quarterly data from Treasury’s TRYM economic model. At face value this seems exceedingly dull, but the data will contain the latest estimates on wealth – most likely at record highs.

And on Thursday, the Bureau of Statistics will recast the latest industry figures on car sales to take account for seasonal factors. The industry data indicated that 93,984 vehicles were sold in March, just under 1% lower than a year ago. However when seasonal factors are taken into account, we believe that car sales rose by 1% in the month. Still, the broad trend is that car sales are going largely sideways.

In the US, there is a bevy of ‘top shelf’ indicators due for release in the coming week. Data on retail sales is released on Wednesday with producer prices (business inflation) set down for Thursday while figures on consumer prices and industrial production are both issued on Friday.

Overall the results should be reasonably healthy. Economists tip a 0.5% lift in retail sales (up 0.6% if car sales are excluded) while production is expected to have lifted by 0.5% in March after a flat reading in February. The prices data should confirm that deflation is no longer a concern, but – at present anyway – inflation is not an issue either. Core rates of both producer and consumer prices probably rose by 0.2% in March.

Of the other data/events, on Tuesday, trade figures are released alongside import and export prices and the monthly Budget results. On Wednesday the latest Federal Reserve Beige Book is issued – covering conditions across Fed districts. And on Friday consumer sentiment, capital flows and the Empire State survey are other indicators to watch.

The other event to keep on the radar screen is the usual monthly download of Chinese economic statistics. On Friday, figures on retail sales, production, investment and inflation are all issued. Interestingly the Chinese trade data is also issued – on April 10 – this Sunday.

Sharemarket

The Australian sharemarket is a mere 10% away from record highs. Sounds too good to be true? What we are tracking is the value of all shares – the amount of stock on issue multiplied by the share price. This accounts for the fact that companies raised equity capital in the global financial crisis as well as the fact that share prices have recovered post GFC.

The value of all shares stands at $1,583 billion, down from the highs of $1,772 billion in late 2007. But some sectors have done even better. Market capitalisation of the ASX 200 Resources sector stands at $388 billion, just under 2% below the record high of $395 billion set in May 2008. Notably 25% of the entire sharemarket is accounted for by the top 200 resource stocks, a smidgen below the record high set in July 2008.

Interest rates, currencies & commodities

The Aussie dollar has had an amazing rebound in a short time period, lifting from US97.25c on March 17 to US104c on April 4 – a gain of around 7%. Clearly sharemarkets across the globe similarly rebounded from lows, highlighting the fact that the Aussie is very much a ‘fair weather friend’. When there are concerns about the health of the global economy the Aussie dollar is one of the first to be sold, but it is quickly back in favour when sentiment improves.

Consumers would expect that the strong Aussie translates into lower prices for gadgets and indeed that has proved correct. Australia is the fifth cheapest of 26 countries in the world to buy the new Apple iPad 2 device according to our new CommSec index. The CommSec iPad 2 index is a modern way of looking at purchasing power theory. That is, the theory that the same good should be sold for the same price across the globe once taking into account exchange rates. As it turns out there are still significant differences in prices across the globe.

Craig James is chief economist at CommSec.