Slower population growth in 2010-12 is good news for interest rates but bad news for retailers

Economic research firm BIS Shrapnel has forecast the rate of Australia’s population growth will slow over the 2010-11 and 2011-12 financial years, taking the pressure off interest rates but potentially adding to the pain being felt by retailers.

BIS says that while Australia’s population growth was a strong 2.1% in 2008-09, a fall in net migration over the next two years will see the nation’s population grow by 1.5% in 2010-11 and 1.3% in 2011-12.

BIS senior economist Jason Anderson argues that while strong population growth has underpinned strong demand in sectors including property and retail, a slower rate of growth in the next two financial years could actually help the Australian economy by reducing inflationary pressures and therefore interest rates.

“We should expect to see some dampening of household spending growth but there should also be some alleviation of inflationary pressure that has resulted from the strong demand growth for domestic goods and services,” Anderson says.

“In terms of the housing sector, shortages will remain and there will be less upward pressure on interest rates.”

While slower population growth is normally bad news for the property market, Anderson argues slower growth could actually give Australia’s housing sector a much-needed breather.

He says that low dwelling construction rates mean demand for property will remain solid, while pressures on the retail maker should ease slightly as net migration falls from 300,000 people in 2008-09 to 175,000 in 2010-11 and 145,000 in the following financial year.

“If net overseas migration had stayed at the 2008-09 level of 300,000 persons per annum, then the queues for some rental properties would have started snaking around the block,” Anderson says.

He says an environment with slower population growth and lower interest rates “would be supportive of residential property markets, and enable a sustained increase in dwelling construction, which is badly needed to address the shortages that already exist”.

While Australia’s struggling retailers will wince at predictions that slower population growth will weight on household spending, Anderson says the wider economy can easily overcome this.

“The economy can handle moderate household spending growth because there is already solid growth in national income in store for 2010-11. The impending jump in Australia’s export incomes, due to the surge in commodity prices, is set to provide a large income injection – mainly for company profits, tax revenues and state government royalties.”