Invasion of the body snatchers

If our population doesn't grow, the economy stalls
July 16, 2012, Matthew Kidman

THE first policy a new federal government should dust off when elected next year is ''Big Australia''. The Kevin Rudd initiative aimed at growing Australia's population from 22.3 million to 35 million by 2050.

Within weeks of taking the top job, Julia Gillard scrapped Big Australia realising that few votes would be garnered from the initiative. A combination of xenophobic and anti-growth feeling swelled and that was enough to bin the whole exercise.

The reality is though that without population expansion Australian economic growth will stall, placing pressure on company valuations and the performance of the sharemarket. Live examples of this already exist in Japan, Italy and Greece. Australia needs a demographic policy that involves targeted population growth.

According to the Australian Bureau of Statistics, the economy grew at an annual pace of 3.2 per cent in the 1990s of which 1.5 per cent was contributed by population growth. In the first decade of the new century, the local economy ratcheted up its growth to just under 4 per cent per year of which population growth can be credited with 1.8 per cent.
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As is well documented, the Australian population, like many other Western nations, is getting older.

In the latest census released last month, it stated that the median age of Australia was 37 years old, up five years in two decades. This is not in itself a concern given that the working population, defined as those people aged between 15 and 65 years, actually increased as a percentage of all people during the same period. The working population is the productive component of society.

This, though, is about to change. It is estimated that by 2015 the median age of Australians will jump to 39 years and the working age will start to shrink from about 67 per cent of the population to 66 per cent. While it does not sound significant, it effectively means demographics will go from being supportive of economic growth to a handbrake.

The Reserve Bank of Australia released a report in 2010 analysing the impact of demographic change on economic growth in a number of countries. It concluded that from 2011 to 2020 demographic changes relating to population growth and the size of the working-age population would reduce economic growth by a full 1 per cent per year in Japan. In the prior decade it had contributed a positive 1.1 per cent.

That is enormous burden to carry for a country that is struggling to grow because of the Japanese penchant for saving instead of spending.

The US is in a better position, but will suffer from a similar fate. In the period from 1996 to 2005 demographic change boosted economic growth by 1.3 per cent each year. But this is forecast to drop to just 0.5 per cent from 2011 to 2020.

A study by the Federal Reserve Bank of San Francisco in 2011 said the ageing population was already having a significant impact on the sharemarket, with the price-to-earnings multiple investors are willing to pay for equities already falling as the median age increases.

The second-largest economy in the world and Australia's biggest trading partner, China, will see the impact of demographics move from 1.4 per cent a year to just 0.2 per cent in this decade.

Many pundits will argue that growth is not compulsory but the economic contractions taking place in Europe should remind everyone how painful and socially disruptive it can be.

Australia's population has grown approximately 1.4 per cent a year over the past 20 years. If this rate continued to 2050, then Australia's population would hit 38 million, some 3 million more than what Rudd's Big Australia would contain. So fears of the population growing out of control are ill-founded. If a targeted population growth policy was implemented, it would require a careful selection process that kept the nation's median age down and, more importantly, retained a similar-sized working population.

The case for an orchestrated increase in the population gains currency when one considers the decline in the other two major contributors to economic growth - terms of trade and labour productivity.

The terms of trade have been a major driver of economic expansion in recent years, but it may have peaked recently with the crest of the mining boom. Meanwhile, labour productivity has been declining in relative terms for a decade with no signs of reversing.

There are strong arguments against population growth, mostly concerning social change, environmental pressures and a lack of infrastructure. Policy must accommodate all of these concerns but none should be insurmountable if a detailed plan is constructed. In fact, if Australia managed to come to terms with its poor infrastructure, dearth of water and lack of geographical planning, the country would be significantly improved from a lifestyle and productivity perspective.

Finally, the world is forecast to grow from today's 7 billion people to about 9 billion by 2060. After this it is expected to stall and then eventually shrink. With less than 23 million people, Australia, as a developed nation, should be expected to contribute to accommodating more people in a crowded world.

Former fund manager Matthew Kidman is a director of WAM Capital.

Read more: http://www.theage.com.au/business/if-our-population-doesnt-grow-the-economy-stalls-20120715-22445.html#ixzz22m029471