Strong population growth will lift living standards for all, economist says

It looks like Treasurer Josh Frydenberg's tax cuts are bearing fruit for the national economy. (AAP)

Deloitte Access says Australia's in position to fend off an economic slowdown due to "heaps of stimulus" from tax and interest rates cuts.

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.

RBA Governor Philip Lowe (left) meets with Treasurer Josh Frydenberg.
Treasurer Josh Frydenberg says there was nothing wrong with his photo with RBA Governor Philip Lowe. (AAP)

But Deloitte predicts the budget will only briefly be in surplus before easing back into modest deficit - while that means Australia will benefit from long-term infrastructure, the spending doesn't "leave much of a rainy day fund".

"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.

"This is the first ever global slowdown in which the world has actually given Australia a pay rise instead of a pay cut," Mr Richardson said.

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.

Money is taken out of a wallet.
The Reserve Bank believes unemployment needs to fall before "wages start to party".

"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.

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.

Weakness in wages is predicted to last longer than the stimulus from China, but the states are helping by keeping up infrastructure spending.

Shadow treasurer Jim Chalmers says the government won't admit there's a problem with the economy, which has reduced consumer confidence.

"The RBA has been forced to pick up the slack where it can, because the government has vacated the field when it comes to economic growth," he said in a statement.

"This third-term government needs to take responsibility for the floundering economy on its watch, which is defined by weak consumption, feeble growth and stagnant wages."

With AAP...

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