- On 06/10/2020
- projections, superannuation
Does Australia need to keep growing?
Australia’s population¹ was 25.65 million at the end of March and was on track to reach 26 million by the end of 2020. Nearly two-thirds of our growth rate comes from net overseas migration; that is, those people permanently entering Australia less those leaving us. Net migration has added about 2.2 million additional Australians over the last decade.
Over the last 20 years, we have also had an influx of temporary residents such as university students and backpackers together with large numbers of tourists.
This growth has led to very high population increases in the greater Melbourne and Sydney regions, requiring huge infrastructure developments to accommodate the extra people. This rapid shift to high concentrations has led to deteriorating living standards as we get more congestion on roads and public transport. There are also crowded high-rise apartment blocks, which are a departure from the famed quarter-acre block, once regarded as the Australian housing model. Some have questioned whether many of these new flats are inappropriately located, perhaps representing the next generation of slum suburbs. And, despite this building boom, home ownership and the associated security it provides has kept falling, especially amongst the young.
Simultaneously, many rural and regional areas have been in steady decline, through increased urbanisation and centralisation of industry.
While politicians and businesses regard this aggregate economic growth as positive, the rapid changes in Australia have not led to strong GDP per capita. This was less than 1% a year for the decade to 2019. In other words, we have been bringing people into the country faster than the economy can adequately provide for them.
Then, along came COVID…
The pandemic has been a circuit breaker on Australia’s growth – per capita GDP aside, actual GDP has fallen for the first time in 30 years, migration has temporarily ceased, and it is likely that the population itself has reduced for the first time.
We have a low fertility rate of about 1.7 children per female which is below the replacement rate of 2.1.² With this rate (which could fall further in a recession) combined with a COVID-freeze on migration, Australia’s population might reduce further over the next 12 months.
Amidst the distressing economic news, there are some positive signs. Regional centres have experienced small population growth as “City emigres” have adapted to working remotely and relocated to family-friendly locations; white-collar workers have cut back on commuting time and have learnt to be productive working from home; and domestic business travel looks like being permanently cut-back, saving more unproductive time and stress.
There are other changes which are difficult to measure. Will higher unemployment, lower demand from stalled population growth and the medium-term demise of the Airbnb market lead to lower house prices in capital cities? That would be an advantage if it meant that young first-home buyers can enter the market.
Will any reset help us to provide more opportunity and reduce inequality in society? Australia is more equal than most countries – the SG superannuation system has been a major factor in reducing inequality of wealth, but there is a lot to do to make Australia a more egalitarian society.
Our economy will change over the next two years until migration and international tourism resumes. It will be an opportunity to plan the future shape of our economy and lifestyles and invest to lift opportunity, productivity and living standards – rather than just some aggregate number.
Market projections post COVID
Against the background of all this uncertainty, we need to think about the impact on the size and shape of our superannuation system which is the biggest engine available to finance the investment we will need. Understanding the future growth of superannuation assets and where they might be deployed, together with the equally important private wealth market, is essential to our planning.
Every year, Rice Warner provides projections of the future growth of these markets using best estimates for the key economic drivers. Normally, it is a relatively simple task to update these assumptions as the core economic assumptions are reasonably stable and the changes are usually modest from year to year.
This year is different:
- COVID-19 has caused economic turmoil globally and the outlook for equity prices and the valuations for many real assets (property and infrastructure) is very uncertain.
- Interest rates remain at historically low levels and are held down by Central Banks – with no sign of any medium-term lift.
- Wage growth is low and high unemployment suggests growth (and SG contributions) will remain stagnant.
- Superannuation liquidity has been impacted by the Early Release Scheme.
- Australia is in recession with many business sectors facing a dismal future in the near term.
The short-term impact (over the next two years) will include the following factors:
- Negligible migration and temporary residents, so fewer new member accounts will be created.
- High unemployment, leading to lower SG contributions.
- Higher insurance claims from a deterioration in mental health (including a higher suicide rate).
- Very low earnings on cash and fixed interest.
- Negligible wage inflation and CPI < 1%.
- Reduced growth in SG contributions due to higher unemployment and low wage increases.
- Reduced levels of voluntary contributions due to lack of consumer confidence.
- Reduced pension withdrawals as minimum payments have been reduced to 50% of normal minimum.
- Stagnant prices of growth assets with reduced earnings, including lower dividends.
Knowing that these factors have moved to extremal values is only part of the challenge. Estimating the extent of the divergence in these factors from long term trends, and how long the divergence will last, adds significantly to the complexity and uncertainty of the task. Rapid V shaped changes in equity market valuations do not translate directly to the broader economy. Scenario testing will be very important this year.
Long-term demographic assumptions
While we only publish fifteen-year projections, we do run some models for up to 80 years – so that we can understand the retirement experience of all current market participants. This requires assumptions about future rates of fertility, migration, and deaths to set the population at the right levels.
We use the Australian Bureau of Statistics (ABS) mid-range population projections, but there is a key question this time. Will the population trends reset to pre-COVID levels, or will the long-term factors be set on a new trend? The best guess is that we will have a few years of dislocation and then revert to past trends in three to five years.
The modelling will be a significant challenge this year, but the real challenge for Australia will be to use the financial resources generated by our two key investment markets to exploit our new and emerging opportunities. Whilst a permanent reduction in the population growth rate would provide an opportunity for per capita GDP to grow and enrich all Australians, the political mantra of growth for its own sake will probably prevail.
Rice Warner’s Superannuation Market Projections 2020 report will be available to clients in December 2020.