160,000 Reasons we Dodged a Recession
(And only one reason why we can’t avoid it any longer)
Unless you’ve been living under a rock, you’d know it’s a federal election year for Aussies.
Come May, we will have the chance to choose the next leader of our country.
Perhaps one of the few upsides of our political leaders is that they never last very long.
There’s too much party infighting for them to meddle with our country.
The topic set to drive this year’s election?
The migrant cap means nothing
Today, thank a migrant.
Some who chose to move here and make Australia their new home.
Because of them, they have kept Australia out of a recession for over a decade.
Although, that may be about to change.
The explosive population growth, particularly if you live in Melbourne or Sydney, is something you can see all around you.
The trains are full.
The trams and buses are crowded.
Public schools are bursting and underfunded.
There’s a long wait at bulk-billing medical facilities.
And traffic is getting worse.
Right-leaning politicians are quick to jump on these perceptions.
Former prime minister Tony Abbott is crying out for annual immigration to be cut from 190,000 to 110,000. Minister for Home Affairs Peter Dutton is another calling to drastically reduce the intake of migrants.
Prime Minister Scott Morrison has said he will cap current immigration at 160,000 for the next four years. That may appeal to conservative Liberals. But that’s a largely symbolic gesture.
While Australia has the ability to offer 190,000 permanent visas each year, we only offered 162, 717 permanent visas for 2018 anyway.
Meaning Morrison’s grandstanding about reducing the number of new migrants means nothing.
In my view, they all miss the point.
Australia is a country founded on migrants.
It began with the exile of convicts.
Then a flood of mostly Welsh and Cornish settlers looking to strike it rich in the gold rush.
Not long after, this was followed by the abhorrent White Australia policy of the early 20th century and the influx of refugees in the aftermath of the Vietnam War.
Ultimately, migrants who settled here and made Australia their home are an integral fabric of our cities and towns.
Yet what anti-immigration proponents ignore is the fact that our immigration policy is a key factor keeping Australia out of recession today.
Blind luck and government intervention
Australia is in its 28th recession-free year.
This record-breaking period of economic growth comes down to blind luck and occasional intervention.
The relaxation of bank lending in the mid-1990s allowed Australians to take advantage of the reinstatement of negative gearing in the final years of the Hawke government.
Meanwhile, Australia’s tiny tech sector was the only real casualty of the dotcom bust, leaving the stock market and economy untroubled.
Following that, the Aussie construction boom that began in 2001 coincided with China’s rise as an economic powerhouse, putting a rocket under Australia’s iron ore export sector.
Similarly, in 2008, we avoided the financial crisis when China unleashed a credit-fuelled construction boom, once again boosting Aussie iron ore exports.
Truck drivers and diamond drillers were making as much as doctors and lawyers. No price for a house was too great, so banks lent freely because everyone knew that housing ‘always’ goes up.
Don’t get me wrong. The Aussie stock market barely went anywhere during this time.
Yet in a period that crippled international markets, Australia sailed through relatively unscathed.
The digging and lending cycle that defined the start of this current decade led to Aussie banks becoming the most profitable in the world. At one point, Aussie bank profits alone made up 2.9% of national GDP.
Less than four years ago, Australia defied recession once again after China’s yuan devaluation in August 2015.
Not long after, though, the situation required intervention.
Prices for commodities dropped. People reduced spending. Wage growth officially became stuck. Construction — a sector that employs 11% of the Australian economy — began to disappear.
In light of this, the federal government stepped up in late 2016 and began announcing massive nationwide infrastructure projects.
Anything to keep our enviable recession-free run going.
But the only reason this blind luck and economic intervention worked was because of high migration numbers.
Broke eight times in a decade
Australia’s population has grown 50% in the past three decades. And if it weren’t for the constant flow of migrants to our shores, Australia would’ve been broke four times over.
The definition of a technical recession is two consecutive quarters of declining GDP growth.
As you can see in the chart below, when you strip down the numbers to show economic growth per person (red bar), there are eight quarters in the past 10 years in which Australia faced the real prospect of recession.
Take a look:
Economic growth per person
Source: Business Insider Australia
Economic growth per capita went backwards.
So even though the Australian population has grown, our individual share has gotten smaller.
In other words, productivity per person is shrinking. As this falls, it takes spending with it. This suggests that an Australia-wide economic recession could be in the near future.
The graph would’ve looked much worse if we didn’t have the influx of new migrants coming to settle in Australia permanently.
The point is, Australia’s booming population, at 25 million, is one of the few things keeping us out of recession.
The simple reason for this is that the more people there are, the more spending there is in the economy. That applies to both the public and private sectors.
In addition, the waves of new workers settling in Australia should help balance out the 25% of the population retiring over the next decade. We simply don’t have enough young people to fill this gap.
Whether some people care to admit it or not, the ongoing prosperity Aussies enjoy now heavily relies on new migrants.
If policymakers put an end to that, the rug will be ripped out from under the Australian economy in time.
And it would almost surely take our record-breaking recession-free run with it.
Editor, The Daily Reckoning Australia