"Also prompting an upward revision to our inflation outlook has been substantial revisions to forecast population growth. Primarily due to a reduced migrant intake, population growth is expected to slow from a peak of 2.2% in 2008-09 to 1.5% in 2010-11 and 1.6% in 2011-12. Assuming average productivity growth and a constant labour force participation rate (to control for the separate effects over these variables) over the next few years, changes in population growth flow directly through to labour force growth. As such, the forecast slowing in labour force growth has the potential to strip up to ½ppts off ‘sustainable’ GDP growth (estimated to be 3 to 3¼%), knocking it down into a range of around 2¾% to 3%.
For inflation, this means that the gap between forecast growth and potential growth (the output gap) will be greater, with price pressures to emerge at lower rates of growth. Indeed this suggests upside risk to our already high longer-term inflation forecasts outlined above.
All other things being equal, a slower rate of population growth will also generate a tighter labour market. We estimate that there will be 107,000 fewer net additions to the labour force in 2011 as a result of slower population growth. While a stronger cyclical outlook for the Australian economy is expected to largely offset the weaker structural outlook for employment growth, our unemployment rate forecast is dominated by the structural influence of our lower population forecast track. In isolation, this deceleration in population growth will shave 0.8ppts off the national unemployment rate by the end of 2011, and a further 0.2ppts by the end of 2012 (assuming the same participation rate and employment growth in both scenarios). Again, the implications for wages pressures, inflation and interest rates are all pointed in one direction in the medium-term – up."
