Price deflation and increasing unemployment in Australia

Two years ago we wrote a paper on price inflation and unemployment in Australia. It allowed us making a projection into 2050:  

“As a final remark on the evolution inflation (DGDP) and unemployment in Australia we present two predictions as based on the labour force projection provided by the Productivity Commission (2005) and the coefficients in (7) and (8) estimated for the period after 1994: a₁=3.299, a₂=-0.0259; b₁=-2.08, b₂=0.0979. We assume that there will be no change in the definitions of all involved macroeconomic variables through 2050 and these coefficients will hold.  Unfortunately, the accuracy of labour force projection has a poor historical record, taking into account the projection between 1999 and 2016. Nevertheless, it may be useful for assessment of the long-term evolution.  Figure 15 displays both predictions, with the period before 2010 represented by actual labour force measurements since the projected ones were not accurate. 

Figure 15. Prediction of inflation and unemployment in Australia through 2050 as based on the labour force projection provided by the Productivity Commission.

 

            The level of price inflation after 2015 will likely fall below zero and will remain at -1.5% per year through 2050. This lengthy period of deflation will be accompanied by an elevated rate of unemployment approaching 9% around 2030. The evolution of both variables is not fortunate for the Australian economy and is chiefly associated with the population ageing. The latter suppresses demographic growth and reduces the rate of participation in labour force. Australia will likely need a larger international migration to overcome deflation and high unemployment. This is the means to overcome deflation the U.S. has been using for many years, but even with a large positive migration the Australian economy will be on the brink of deflation during the next four decades. Without migration, Australia will soon join Japan having the same demographic problems and price deflation since the late 1990s.”

 

Here, we update our projections with three new readings for 2010 through 2012. (We have borrowed all estimates from the Australia Bureau of Statistics.) The Australian economy is heading into a long deflation period with an elevated unemployment. In 2013, the rate of unemployment will rise to 6.5% or even 7.0%. The GDP deflator will likely be negative in 2013 following the 2012 trend.

The reason behind these processes is the same as in Japan – the fall in labor force.