Spending by international students accounted for more than half of Australia’s economic growth in 2023, according to new research warning that a sharp increase in visa refusal rates will be a headwind to growth this year.
GDP growth slumped to an annual rate of 1.5 per cent in December 2023, the Australian Bureau of Statistics said this week, as non-essential spending and home building activity contracted in response to the fastest interest rate tightening cycle in decades.
International student numbers have risen sharply since the Australian border reopened in February 2022 after COVID-19 pandemic closures, though the pace of visa approvals has slowed recently as the Albanese government tightens the screws on foreign arrivals.
Almost 650,000 student visa holders were in Australia by last December, up sharply from less than 300,000 in 2021.
Consumption understated
NAB senior economists Brody Viney and Taylor Nugent said about 40 per cent of spending by international students was tuition fees, while the remaining 60 per cent was on the consumption of goods and services in Australia.
If that latter category of spending was classified in the national accounts as consumption rather than as an export, then annual consumption growth would have been 1.1 per cent in December, instead of just 0.1 per cent.
The figures suggest that tepid consumption figures understate the true strength of the domestic economy.
This paints a much stronger picture of domestic demand for goods and services in Australia and helps to explain why businesses in consumer-facing sectors, such as retail and recreation and personal services, have continued to report high levels of capacity utilisation in the NAB business survey,” Mr Viney and Mr Nugent said.
“This will not be news to the RBA, but it does help reconcile the softness in consumption growth with persistence seen in measures of excess demand, such as capacity utilisation in consumer-facing industries.”
Growth headwind
But international students will add far less to GDP in 2024, as visa approval rates fall back to pre-COVID-19 levels. NAB expects education exports will contribute a modest 0.25 percentage points to GDP growth in 2024, which is forecast to run at a below trend annual rate of just 1.7 per cent.
“However, NAB Economics forecasts a pick-up in household consumption growth through the second half of 2024, to around 1.6 per cent year-on-year, as easing inflation, tax cuts, and a waning drag from interest rate increases supports a pick-up in real disposable incomes,” Mr Viney and Mr Nugent said.
“That should broadly offset the end of the tailwind to growth from international students and means that, for consumer-facing businesses, aggregate consumption-like demand growth may be broadly stable, albeit the demographic composition will shift.”
Goldman Sachs chief economist Andrew Boak said he broadly agreed with NAB’s conclusion that rising household consumption will offset the decline in international student arrivals.
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