Australia’s speedy rebound in population growth could have “unanticipated or more pervasive effects” on the economy, potentially adding to inflationary pressures, a senior Reserve Bank official says.
The rise in numbers – potentially increasing the population by 700,000 over two years – was one of the biggest changes over the past six months, Marion Kohler, the RBA’s head of economic analysis, told a CEDA event in Perth on Wednesday.
The growth was coming from the faster-than-expected return of international students and working holidaymakers as Covid-related border restrictions were lifted, and low levels of departures.
One result was increased demand for housing, pushing up rents, particularly in the largest cities. Employment growth will also quicken, particularly in “hospitality and other sectors that employ higher shares of temporary residents than average”, Kohler said. The changes would alter forecast models.
“[The] faster recovery in the population could turn out to have unanticipated or more pervasive effects,” Kohler concluded. “We will also be carefully monitoring how the competing forces affecting both consumer spending and the labour market are playing out, and how the easing in cost pressures coming from global supply chains translates into domestic prices.”
Kohler’s comments mostly dealt with how the RBA models the various changes in the economy, including the effect of higher interest rates.
The RBA surprised many commentators by lifting its cash rate for an 11th time since last May at Tuesday’s board meeting. The bank’s governor, Philip Lowe, said the rebound in housing prices was among the reasons for the hike.
Kohler said the RBA expected “growth to remain subdued through this year as higher interest rates, the higher cost of living and earlier declines in household wealth continue to weigh on consumer spending”.
“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,” she said.
On Tuesday, the RBA said GDP growth would slow to 1.25% this year. That implied per-capita output would shrink given population expansion of 2% or more.
One puzzling element for the RBA has been the disconnect between wholesale TV prices, for instance, and the cost to consumers. Retail prices had doubled during the pandemic amid disruptions but while supplies had recovered and wholesale prices were falling, retailers weren’t passing on the lower costs.
“The decline in wholesale panel prices has flowed through to retail prices of TVs and other audio and visual equipment in other advanced economies,” Kohler said. “But prices of these types of goods are yet to decline in Australia.”
Even with such lags, the RBA is expecting consumer price inflation to decline further during 2023, she said. Still, “the ongoing tightness in the labour market and high level of demand for services lead us to expect domestic inflationary pressures to continue”.
Kohler said inflation models were more accurate when forecasting how demand would push up prices but were less capable in dealing with disruptions to supply, such as during the pandemic.
“[W]e know supply-side disruptions have added a lot to inflation over the past couple of years,” she said. Most of that added boost to prices, however, should abate in coming years – assuming other shocks don’t emerge.
