Migration is slowing in Australia, and economist Stephen Koukoulas believes this is good news for the economy. After a surge following the reopening of international borders post-COVID, net migration is gradually easing. From a peak annual inflow of 528,000 people in 2022-23, net migration fell to 395,000 in 2023-24. It is projected to continue this downward trend, reaching 260,000 in 2024-25, 255,000 in 2025-26, and settling at 235,000 per annum thereafter.
This return to an annual intake of 235,000 people represents a shift towards a more sustainable growth level, a significant change from the frenetic pace seen immediately after the borders reopened. Koukoulas sees this as a government effort to better target and manage migration levels, ensuring they align more closely with the country’s economic conditions.
The period of rapid migration inflows presented a host of challenges for the Australian economy. The sudden influx created a shortage of available rental properties, pushing rents to levels more in line with wages growth. This situation fed into what some described as a housing ‘crisis,’ though Koukoulas cautions that this term may be overstated. Nevertheless, the high demand for housing, driven by a sharp rise in population, resulted in increased house prices. Even amidst an aggressive interest rate hiking cycle from the Reserve Bank of Australia (RBA) and a recent rise in unemployment, housing affordability has become increasingly strained.
Koukoulas notes that the swift demand from high immigration overwhelmed the available supply of dwellings, creating a situation where rents and prices escalated rapidly. This dynamic highlighted the delicate balance between migration levels and the housing market, where even minor shifts in population growth can have significant impacts.
In the labour market, the effects of strong immigration inflows have been mixed. On the positive side, the arrival of a large number of workers coincided with a period of skills and labour shortages. This surge in available labour helped drive the unemployment rate to a near 50-year low of 3.5 percent. Businesses, particularly those struggling to attract skilled and unskilled workers, benefited from the influx of new immigrants, who provided much-needed labour.
However, this increased labour supply also had the effect of suppressing wages growth, particularly as it coincided with a broader weakening of the economy. While wages growth had been stagnant for many years, it began to improve post-pandemic thanks to government initiatives such as increases in minimum wages and other awards through Fair Work Commission rulings.
The Wage Price Index (WPI), a key measure of wage growth, showed signs of improvement during this period. It rose from around 0.5 percent in the middle of 2021 to 0.9 percent in 2022, before averaging above 1 percent in 2023. The WPI peaked at 1.3 percent in the September quarter of 2023, coinciding with the historically low unemployment rate. This correlation is no surprise, as a tight labour market often leads to higher wages.
However, since then, the WPI has eased, recording 1.0 percent in the December quarter of 2023, followed by 0.9 and 0.8 percent in the two most recent quarters. According to Koukoulas, the reasons for this slowdown are the cooling economy and the excess supply of labour driven by high net migration. As the economy slowed and the labour market became more saturated, wages growth naturally decelerated.
Another issue highlighted by Koukoulas is the strain that rapid population growth places on infrastructure. The sudden surge in population has put significant pressure on roads, public transport, schools, and health facilities, among other areas. State governments, in particular, have been forced to increase spending on infrastructure to keep up with the demand created by the influx of immigrants. This situation has led to budgetary challenges, as governments struggle to balance the need for infrastructure investment with fiscal constraints.
The pressure on infrastructure has also contributed to inflationary pressures over the past two years. As governments ramped up infrastructure spending to address bottlenecks and supply issues, the increased demand for construction materials and labour added to the inflation problem. While these infrastructure investments are necessary to support a growing population, they have also added to the complexity of managing economic stability.
Despite these challenges, Koukoulas remains optimistic about the easing of migration growth. He views the gradual reduction in net migration as a positive development for the economy, as it allows for a more balanced and sustainable approach to population growth. This easing of migration will help alleviate some of the pressures on the housing market, labour market, and infrastructure, ensuring that the economy is not overwhelmed by an influx of new residents.
Koukoulas also emphasises the importance of Australia’s humanitarian migration intake, which remains unchanged. Australia continues to play a role in providing refuge for people in extreme circumstances, and this aspect of migration policy is seen as a vital part of the country’s commitment to global humanitarian efforts.
Koukoulas believes that the current level of migration, while lower than the post-pandemic surge, is more in line with Australia’s long-term economic needs. The reduction in net migration to 235,000 people per annum represents a more measured approach that balances the benefits of population growth with the need to maintain economic stability. This ‘Goldilocks’ level of migration—neither too hot nor too cold—should provide the economy with the critical mass and skills necessary to support steady growth, while avoiding the pitfalls associated with rapid population increases. As Australia continues to navigate the post-pandemic economic landscape, the focus on sustainable migration levels will play a key role in ensuring a stable and prosperous future for the country.
Quotes from Stephen Koukoulas’s opinion piece published in Yahoo Finance
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