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Analysis: Population growth slows in the pandemic; implications for real rates

• Population growth has slowed sharply in many economies around the world during the pandemic. That’s especially the case in Australia and other countries that had a high contribution from international migration to population growth. Population growth in the US slowed to 0.4% in 2020, the slowest since 1918, while in China it was barely positive at 0.1% and the lowest since 1961. Australia’s population growth rate has also slowed sharply from 1.5% prior to the pandemic to just 0.1% now.
• For Australia (as with other high immigration intake countries), population growth should begin to recover when international borders are re-opened (latest guidance is from mid‑2022). Migration accounted for around 2/3rds of Australian population growth prior to the pandemic and the government appears committed to resuming migration inflows. Treasury projects population growth to be back to 1.3%y/y by 2024.
• For the near-term outlook for labour supply in Australia, we suggest there is a need to distinguish between the transitory impacts from fewer temporary workers and permanently lower population from lost long-term migration. There are now fewer temporary workers in Australia, but as migration normalises the number of temporary workers should return. The flow of new net long-term migration is expected to return to previous levels, but the lost long-term migration over the pandemic is not expected to be caught up, leaving the labour supply permanently lower.
• Outside of the interruption to migration patterns, heightened uncertainty at the onset of the pandemic also led to lower birth rates in late 2020 and early 2021. Births will likely revert over time to previous trends. In addition, many of those deferred pregnancies are expected to be caught up, rather than lead to permanently lower population growth. In Australia, Treasury forecasts see 80% of the fall in births due to the pandemic being caught up within 10 years.
• The extreme pandemic effects on population growth will likely be short-lived, however, it’s likely global population growth will continue its trend slowing, due to slowing birth rates. That effect has been weighing on real neutral interest rates and successive peaks in interest rates.
• How much could demographics weigh on real interest rates? An IMF Working Paper looking at Japan, where a slowdown in population growth has been underway from some time, has found that “since the GFC, the decline in working-age population growth has contributed to about -0.3 percentage points on average to the estimated negative natural rate—which is about -0.7 percent during this period” (or about 40% of the decline). (IMF:  Demographics and the Natural Rate of Interest in Japan).

Chart 1: Population growth has fallen during the pandemic, especially in high migration countries

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