Australia’s economic outlook, like many other nations across the world, has been impacted by the once-in-a-century-pandemic known as COVID-19. In the latest Intergenerational Report, the Australian Government has outlined the challenges and opportunities that lie ahead for Australia’s population, workforce participation and the resulting economic outlook.
Population projections revised down from previous estimates
Growing at an average annual rate of 1.4%, Australia was experiencing strong population growth prior to the pandemic. Largely due to international border closures and the subsequent decline in net overseas migration, Australia’s population growth is expected to halt to just 0.1% in 2020-21 before recovering to 1.3% by 2023-24. In the long term, however, the population growth rate is projected to settle to just 0.8% by 2061, just half of what it has been in recent peaks (1.7% in 2016-17).
While net overseas migration is forecast to recover and assumed to stay at 235,000 annually until 2061, the trend of Australians having children later in life and having fewer of them is projected to continue. The total fertility rate is projected to remain below the replacement rate at 1.62 over the next 40 years. As a result, Australia will not reach what was once thought to be the mid-century milestone of 40 million by 2061, with 38.8 million being the revised forecast.
While the health impacts of COVID-19 in Australia have been limited, the demographic impacts of closed borders and reduced births will be felt for decades. In 2061 the population will be smaller, older and with fewer overseas born than was predicted pre-COVID.
Australia’s ageing population and a projected participation rate of 63.6%
While the impact of COVID-19 on labour force participation has been significant (a fall from 65.9% in March 2020 to 62.6% in May 2020), participation rate has recovered to record high levels. In May 2021, one year on from the record impact of COVID-19, 66.2% of Australians over the age of 15 are a part of the labour force.
Over the next 40 years, participation rate is projected to decline to 63.6% by 2061. This is a result of our ageing population, expected to be offset, however, by a number of factors.
- The continual increase in workforce participation by older Australians, supported by longer life expectancy, greater availability of part-time and less physically demanding jobs.
- The rise in female workforce participation, supported by changing social attitudes and government policies, availability of childcare, and availability of part-time and flexible work arrangements.
It is also worth noting that participation rate has consistently been revised in previous intergenerational reports, demonstrating the population’s capacity to outperform current expectation over the next 40 years.
While our population is ageing, this highlights the ongoing longevity Australian are experiencing. While the life expectancy increases are slowing, it still means that today’s children will live longer, and work later than previous generations, and so they will extend working age from today’s definition of the mid-sixties to the late seventies, and perhaps beyond.
Productivity assumed to remain at prehistoric level
With a downward revision of projected population, and a long-term decline in labour force participation, the third P of Productivity will be doing the heavy lifting for economic growth. With a long-term labour productivity growth rate of 1.5% per annum, consistent with Australia’s 30-year average, growth in productivity is projected to offset the government spending that has led to Australia’s high speed of economic recovery and key future spending areas such as health and aged care.
Economic growth will be lower than it otherwise would be
The overall smaller population size, changes to labour force participation, and projected rate of productivity growth mean that GDP growth over the next 40 years is projected to be lower than the past 40. Real GDP growth is projected to be 2.6% per year over the next 40 years, this compares to 3% over the past 40 years.
The deficit in cash balance is also projected to remain for the next 15 years, from 7.8% of GDP in 2020-21 to 0.7% of GDP in 2036-37, before widening again to 2.3% of GDP by 2060-61, a reflection of the projected rise in spending on health.
The need to respond now for the emerging generations’ sake
Like much of the world, Australia is going to need to respond to the changes to our economic future, brought on by COVID-19. This will involve increasing the capacity of our economy to investing in infrastructure, improving workforce skills, participation, and productivity. It is essential that, keeping with the Intergenerational Report title, the nation responds now to these issues, to set up the emerging generations (such as Generation Alpha) for future success.