Strong population growth is critical to ensuring Australia emerges from an economic slowdown, a leading economist says.
In its latest Business Outlook released on Monday, Deloitte Access Economics presents a relatively rosy economic outlook thanks to "heaps of stimulus" from recent tax cuts and lower interest rates.
But the Deloitte report warns there's not much "wriggle room" if it does worsen.
The report notes the federal government's split population policy approach of trying to curb migration to the cities, while encouraging more overseas students and workers to regional areas.
"Now that's a tricky combination to do and it's not clear the government's going to be able to do it. You can't have walls inside Australia," the firm's partner Chris Richardson told SBS News.
He said Australia should welcome extra population growth.
"We need to do it right and have the infrastructure spending to match, but if we do that, you actually get living standards going up for everybody, the new arrivals and the people already here."
Surplus will be short-lived
Other factors helping the economy include lower bank funding costs and a modestly lower Australian dollar.
The Morrison government's election win has also helped to reduce policy uncertainty.
"That combination means that the current slowdown looks to be well contained," Mr Richardson said.
But Deloitte predicts the budget will only briefly be in surplus before easing back into modest deficit.
Treasurer Josh Frydenberg says there was nothing wrong with his photo with RBA Governor Philip Lowe. (AAP) Source: AAP
"And the Reserve Bank is busily eating into its own rainy day fund," the report states.
"So let's hope it doesn't rain - policymakers haven't left much wriggle room if it does."
Interest rates to stay low
Deloitte said that despite a global slowdown, China has helped the local economy through a surge in demand for Australian coal and iron ore.
National income growth is right on its longer term average, he added.
But inflation and wage growth may "continue to disappoint", as unemployment isn't able to lower enough to help the two.
The Reserve Bank of Australia believes unemployment - currently at 5.2 per cent - needs to be a little under 4.5 per cent before "wages start to party", Deloitte says.
"But to get unemployment down to 4.5 per cent it needs to create an extra 200,000 jobs - which is hard, and that's why it is asking the federal government to help," Mr Richardson said.
More Money in the wallet for low paid workers Source: AAP
Deloitte, therefore, predicts the cash rate to soon lower to 0.75 per cent or 0.5 per cent, with Australia to follow the global trend of having very low rates for some time.
Mr Richardson also notes the RBA's two recent interest rate cuts happened because the economy was not only slower, it was slower than it needed to be.
