You could call it gloom, or call it realism, but the likelihood is the economy will be growing more slowly from now on.
And we’re talking not just the next year or two – where the Reserve Bank’s rapid rise in interest rates means if we don’t go backwards, we’ll have been let off lightly – but the next maybe 40 years.
No one – not even economists – knows what the future holds, of course. But this long-term slowing is the considered guess of the secretary to the Treasury, Dr Steven Kennedy, who this week gave us his summation of the Treasury’s recent intergenerational report, which makes largely mechanical projections – not hard-and-fast forecasts – for the economy over the 40 years to 2063.
Kennedy says the projections are “illustrative”. A key assumption on which they’re based, that present government policies don’t change, means the projections demonstrate “the longer-term implications of our current path”.
The report’s “aim is to avoid the risks projected … through ongoing improvement and reform of policy settings”.
Even so, I think we’re justified in concluding that the slower growth the report projects is more likely to eventuate than either unchanged or faster growth. That’s because so many of the factors likely to affect our future growth are beyond the government’s control.
The report projects that real gross domestic product – the nation’s total production of goods and services – having grown by an average of 3.1 per cent a year over the past 40 years, will slow to growth of 2.2 per cent a year over the coming 40 years.
How would this slowdown be explained? The Treasury’s standard way of analysing economic growth is to break it up into the three main drivers of growth – known as “the three Ps”: growth in the population, growth in the population’s participation in the labour force, and growth in the productivity of the workforce.
Notice how people-centred this way of chopping up economic growth is?
First. Population. Whereas our population grew at an average rate of 1.4 per cent a year over the past 40 years, it’s projected to grow by just 1.1 per cent over the coming 40.
These days, “natural increase” – births minus deaths – accounts for only about 40 per cent of the growth in our population, with “net overseas migration” accounting for the remaining 60 per cent.
The Treasury projects a further slow decline in our “fertility rate” – the number of births per woman – which has long been well below the 2.1 children “replacement rate” needed to hold the population steady over the years.
So we’ve long used high immigration to keep the population growing. Net migration fell sharply when we closed our borders during the pandemic. It has surged since the borders were reopened, but the Treasury expects it to fall back to 235,000 people a year once the surge has passed.
This level is what the Treasury projects for the rest of the years to 2063 – meaning that fixed number would fall as a percentage of the growing population. Even so, the population is expected to exceed 40 million in the early 2060s.
It’s just a projection, but I don’t have trouble believing immigration levels will decline rather than increase in the coming years. With all the rich countries – and China - having fertility rates well below the replacement rate, I can see far more competition for immigrants than there has been, especially since we only want skilled immigrants.
This expected slowdown in immigration means the overall size of the economy wouldn’t be growing as fast as it has been, but that doesn’t necessarily mean those of us who are already here will be worse off. That depends less on the economy’s overall growth and more in what’s happening to growth in GDP per person.
The report projects that, whereas real GDP per person grew by 1.8 per cent a year on average over the past 40 years, it will slow to 1.1 per cent a year over the coming 40.
Ahh. So, not just slower growth in the economy, but a much slower rate of improvement in our material standard of living. We’d still be getting more prosperous, but at a rate so small that it would be hard to notice.
And the problem must be coming from the other two Ps – participation and productivity improvement.
At present, the “participation rate” – the proportion of the working-age population that’s either in work or actively seeking it – is the highest it’s ever been, at 66.6 per cent, but the Treasury projects it will have fallen to 63.8 per cent by 2063.
Why? Because the proportion of the population aged 65 and over is projected to rise from 17 per cent to 23 per cent. So population ageing means more people will be too old to work.
But this will be countered to an unknown extent by more women of working age taking paid employment, and a healthier post-65 population choosing to keep working, even if only a few days a week.
However, most of the slowdown in GDP growth per person is explained by the expectation that the rate of improvement in the productivity of labour will be slower.
Whereas productivity improved at an average rate of 1.5 per cent a year over the past 30 years, it’s improved by only 1.2 per cent a year over the past 20 years – and that’s the rate the Treasury has projected over the coming 40 years.
There are plenty of reasons to expect productivity improvement will become harder to achieve. Just one is the greater share of GDP coming from the provision of labour-intensive services and the lesser share from the capital-intensive production of goods. It’s a lot easier to make machines more productive than do the same for people.
Finally, another reason for expecting population, participation and productivity to be weaker in coming decades is that various other rich countries’ experience is leading them to expect the same.
