Australia Cuts Potential GDP Growth to 2.75% as Population Slows

  • Potential rate has fallen from about 3%, Treasury's Ray says
  • Treasury to finalize mid-year economic forecasts after 3Q GDP

Australia’s Treasury lowered its estimate of the economy’s potential growth rate, or speed limit, reflecting weaker population growth and fewer hours worked in an economy adjusting to the end of a commodity-price boom.

The economy’s potential rate will be about 2.75 percent over the next few years, down from 3 percent estimated at the time of the budget, Nigel Ray, deputy secretary of Treasury and responsible for its macroeconomic group, said in a speech in Sydney Tuesday. The rate is projected to fall further, reaching 2.5 percent by 2050, as the population ages, he said.

“It is likely that, on average, we won’t have to grow quite so fast” to close the output gap as previously thought, Ray told a forum of economists. “The economy will of course, by definition, still have to grow a bit faster than potential.”

Australia’s population growth has eased as a weakening economy has diminished the country’s appeal to migrants. The central bank has cut interest rates to a record-low 2 percent to help cope with the unwinding of a decade-long mining boom and support consumption as wage growth slows.

The International Monetary Fund warned in June that the Australian economy’s
speed-limit -- or the growth rate at which inflation starts to accelerate -- could drop from above 3 percent to 2.5 percent. The Reserve Bank of Australia and Treasury have also indicated in recent months that the potential growth rate was likely lower.

Growth in Australia’s working-age population slowed to 1.5 percent over the year to June 2015, lower than the budget’s assumption of 1.75 percent, and is “well below its average yearly growth over the past 10 years,” Ray said.

Treasury will finalize its mid-year economic and budget forecasts following the release of third-quarter gross domestic product next week, Ray said.