Immigration drop could hit Oz economy

Photo / HoS.

Treasury warns growth could suffer if Government rejects 'Big Australia'

SYDNEY - Australia is abandoning a six-decade consensus favouring immigration, risking slower growth and faster inflation in a nation short of workers to help meet China's demand for its commodities.

Prime Minister Julia Gillard is pushing reduced population gains to lure voters in suburban districts she needs to win August 21 elections, an appeal to neighbourhoods faced with pressure on road systems and housing.

Since taking office last month, she's dropped her predecessor's endorsement of a "Big Australia" policy that envisioned a surge of more than 50 per cent in citizens in the coming four decades.

The consequence of diminished immigration may be a hit of almost half a percentage point to the economic growth rate, the Treasury says.

With job gains at the strongest since 2006, an end to the migration programme also may foreshadow a spiral of wages that forces the central bank to raise interest rates to contain inflation.

"Once unemployment falls below 5 per cent, it's sort of a danger zone" for the central bank, said Rob Henderson, chief markets economist at National Australia Bank in Sydney, who has analysed the economy for more than three decades and was an adviser to former Prime Minister Bob Hawke.

"Skilled migration forms a very important safety valve in the economy."

Under the baseline scenario of a Treasury report in February, the population is forecast to expand 1.2 per cent a year to 35.9 million by 2050. Paring that rate by one-third would cut the average annual economic growth rate to 2.3 per cent from 2.7 per cent, according to the Treasury. Net migration is the key variable, the study said.

The Treasury's projections take on added importance in the aftermath of the policy shift by Gillard.

Australia's net migration surged to more than 1.1 million in the past five years, compared with about 575,000 in the 2000-2004 period, data compiled by Bloomberg showed.

Gillard's call comes amid a shift in immigrants' home countries. The proportion of immigrants from northwestern, southern and eastern Europe declined 0.8 percentage points in the 10 years to 2008, and those born in northeast, southern and Central Asia increased by 1 point during the period, the bureau of statistics said. As of June 30, 2008, a quarter of Australia's population was born overseas.

Gillard, campaigning to win Labor a second straight term in office in the August 21 vote, warned in a July 20 speech against "hurtling down the track towards a big population" and said the current growth model is irresponsible. By contrast, Rudd said "I believe in a big Australia" in an October speech.

Opposition Liberal-National coalition leader Tony Abbott pledged on July 25 to reduce Australia's annual rate of net overseas migration to no more than 170,000 by the end of the next government's first term from 298,924 in 2008-2009.

Diminished labour-force gains would be bad news for Western Australia, the centre of the mining boom driven by demand from China. The region will need an extra 500,000 workers over the next 10 years as BHP Billiton, the world's biggest mining company, and Xstrata, the top thermal coal exporter, develop projects, said John Nicolaou, chief economist at the state's chamber of commerce and industry in Perth. He estimated the state will be short of 200,000 workers by the end of 2020, even with current population growth.

"If we don't address it, it will lead to lower economic activity and higher prices due to capacity constraints," Nicolaou said. That leads to a less productive workforce, project delays and higher interest rates, he said.

Australia's unemployment rate dropped to 5.1 per cent in June, compared with an average rate of 5.44 per cent in the past decade. In Western Australia, the level was 4 per cent.

"We need more people to grow," said Steve Batchelor of S&N Civil Constructions in Perth, a contractor to clients including Melbourne-based BHP, London-based Rio Tinto Group and Zug, Switzerland-based Xstrata.

Australia's central bank has increased the benchmark rate six times to 4.5 per cent since early October from a half-century low of 3 per cent, citing an economic expansion it forecasts will almost double to 4 per cent in the next two years fuelled by China's demand for iron ore and energy.

- Bloomberg