Australia’s faster-than-expected population growth could have “unanticipated or more pervasive effects” on the economy, a senior Reserve Bank official said, a day after policymakers unexpectedly raised interest rates.
(Bloomberg) — Australia’s faster-than-expected population growth could have “unanticipated or more pervasive effects” on the economy, a senior Reserve Bank official said, a day after policymakers unexpectedly raised interest rates.
“Higher population growth increases demand for housing. Initially we expect this adjustment to come through higher rents and higher average household size,” Marion Kohler, head of economic analysis at the RBA, said in a speech in Perth Wednesday. “In the longer run, there is also a boost to dwelling investment.”
Australia is experiencing a jump in population growth, currently running at about 2%, compared with a pre-pandemic average of 1.5%. That’s driving up demand for housing, goods and services in an environment of elevated inflation and shortage of homes.
Kohler said higher population growth is expected to boost employment as well.
She also pointed to two other factors that have changed in recent months that affect the outlook:
- Lower-than-forecast growth in energy costs driven by government policies
- Resilience in the Australia’s housing market, with prices climbing for a second straight month in April
“With housing prices seemingly stabilizing a bit sooner and at a higher level than most observers would have expected, the total effect of lower housing prices on consumption will be a bit smaller,” she said.
The RBA forecasts economic growth will remain subdued through this year as higher borrowing costs weigh on activity. The central bank unexpectedly tightened policy on Tuesday to take the cash rate to 3.85% from a record-low 0.1% a year earlier as it tries to slow consumer-price gains.
“From 2024, we’re forecasting growth to remain below trend but pick up a little, as the effect of the earlier monetary policy tightening wanes, inflation moderates and household wealth recovers,” Kohler said.
The unemployment rate, which is hovering near a 50-year-low of 3.5%, is expected to nudge up but remain below its pre-pandemic levels over the next couple of years, she said.
While inflation is expected to ease, Kohler pointed to forces that are fueling price pressures — ongoing labor market tightness and still-strong demand for services.
The RBA will release it’s full suite of updated economic forecasts on Friday.
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