Fitch Expects Immigration Loss Due To Covid Lockdown To Weigh on Australia’s Growth

Australia growth pre-pandemic was one of the strongest in the developed world. The rapid rise in the working age population with fast net immigration accounting for over half of the expansion helped fuel the strength. Fitch believes the Covid Lockdown to weigh on the recovery GDP in the medium term.

Australia growth pre-pandemic was one of the strongest in the developed world. The rapid rise in the working age population with fast net immigration accounting for over half of the expansion helped fuel the strength. Fitch believes the Covid Lockdown to weigh on the recovery GDP in the medium term.

Australia Net Migration 1971 to 2020

Note this release by the ABScovers data up to 30 June 2020 and as such, covers the start of the COVID-19 pandemic period. Some of the changes recorded in this release are due to the impact of the pandemic.

Rating agency Fitch expects the resultlant shock to net immigration from the Covid-19 pandemic lockdowns to weigh on Australia’s potential GDP growth over the medium term.  Whilst they see neet immigration picking up from mid-2022,  the shortfall in 2020 and 2021 is unlikely to be fully reversed.

Fitch forecast growth in the working-age population between 2019-2026 to be much lower than prior to the pandemic, leading them to forecast potential GDP growth to fall to 2.1% on average.

Migration a Key Supply-Side Growth Driver:

Australia’s historical GDP growth performance was one of the strongest among large developed economies prior to the pandemic, averaging 2.9% between 2000 and 2019. We believe this was driven by a rapid rise in the working age population, reflecting fast net immigration, which accounted for over half of the expansion. Historical productivity performance was, by contrast, lacklustre. – Fitch

The ABS found that in 2020, there were over 7.6 million migrants living in Australia. This was 29.8% of the population that were born overseas. One year earlier, in 2019, there were 7.5 million people born overseas.

Nearly every single country from around the world was represented in Australia’s population in 2020.

  • England (980,400) continued to be the largest group of overseas-born living in Australia. However, this decreased from just over a million, recorded throughout the period 2012 to 2016
  • Those born in India (721,000) were in second place, with an increase of 56,300 people
  • Chinese-born (650,600) fell to third place, with 17,300 fewer people
  • Those born in Australia (18.0 million) increased 211,400 during the year.

Huge Migration Shock:

While Australia has been praised for the initial ‘zero-Covid-19’ approach taken by the Australian authorities that met shutting down international borders the big side affect, and now handbreak to growth was immigration of workers.

Fitch noted that “This dried up inward migration in a matter of weeks and resulted in acute labour shortages, which have persisted during the latest 3Q21 lockdown, despite a pull-back in labour demand.”

Vaccination progress will allow immigration to resume in November 2021 as border restrictions are relaxed, but we do not expect pre-pandemic levels to be reached until 2023 and doubt immigration will surge in subsequent years to make up for the 2020-2021 shortfall. – Fitch

Fitch forecasts that the annual working-age population growth over 2019-2026 is likely to fall to 1.0%, from a pre-pandemic average of 1.6%.

Supply Side Constraints, Inflation Pressures:

Lower potential growth could see the output gap turn positive in 2023 or even earlier, given the short-term hit to potential growth. Fitch also expect underlying wage growth and inflation to rise above pre-pandemic levels amid the tight labour market. They see this prompting the RBA to end net asset purchases in 3Q22 when the recovery is in full swing. The RBA last month said interest rate on Exchange Settlement balances to zero to continue to purchase government securities at the rate of $4 billion a week until at least mid-February 2022. The bank added that says the central scenario is that the conditions for a rate rise will not be met before 2024.

 

Source: Fitch ABS

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