Praneeta Mahajan
Hamilton, October 13, 2023
The general view is that increased net immigration adds more to the demand side of the economy than the supply side, boosting the housing market, adding to inflationary pressures, and consequently pushing interest rates up.
However, a report issued by ASB Bank recently discussed if that is in fact the case with the current surge in migration. The report said, “Net immigration inflows are undoubtedly strong at present and have been a major support factor that has kept the economy afloat. However, the New Zealand economy is hardly booming and the vibe this time around seems considerably at odds with past immigration cycles.”
The report, prepared by Senior Economist Mark Smith said, “Current net inflows have hit record annual highs, with the pattern of upward historical revisions continuing. We expect that net immigration flows, which started this year strong, will continue to moderate over time. This, however, is still uncertain, with the risk of a higher for a longer period of strong net immigration.”
Boost present but not strong
The general view is that increased net immigration adds more to the demand side of the economy by boosting the housing market and consumer spending. This will outweigh any lift in supply-side capacity, add to inflationary pressures and, consequently, push interest rates up.
The aggregate demand is firming, and the housing market is starting to hot up, but considering the magnitude of net immigration inflows, house prices and overall economic growth should be off the charts.
The boost to domestic demand and the housing market from strong net immigration can take some time to accrue. It could just be timing, with the conventional view of up to a 12-month lag from net immigration to economic activity and inflation.
Alternatively, it is also possible that the current composition of net immigration this time around poses less upside risk to the inflation outlook. The economic boost could be smaller, and the migration influx could benefit the supply side by alleviating capacity bottlenecks.
The ASB report said, “While we do not doubt that increased net immigration will boost the demand side of the economy, we believe that the composition of net inflows will have a bearing on how large the boost will be to domestic spending and the housing market. It is also our view that the composition of net immigration impacts the labour supply, broader supply-side capacity and hence the overall impact on inflation.
Migration figures are notoriously volatile and prone to sizeable revisions but have remained robust nonetheless, with annual net permanent and long-term (PLT) inflows hitting a record high. The driver remains very strong inflows of non-New Zealand citizens, with annual arrivals on work visas hitting record highs. More upward historical revisions are likely, and while we expect the pace of strong net inflows to moderate, there is the risk that the strong pace of net inflows holds up for longer, with implications for the New Zealand economic and interest rate outlook.
Tourism inflows into New Zealand have tailed off after the FIFA Women’s World Cup but were also revised up. However, strong pent-up demand for overseas travel by resident Kiwis points to a lower net boost to the New Zealand economy than earlier assumed.
Departures remain strong
The easing of residency requirements for New Zealand residents into Australia will likely maintain the allure of New Zealand as a migration destination, even if it is more of a springboard into Australia.
The ASB report highlighted that the PLT departures increased to 112,492 persons, one of the highest months on record in August 2023. Annual departures rose to 115,123 persons, the highest since 2012.
The report states, “The bulk of the departures were New Zealand residents (68,500 annually), and we suspect that the carrot of the strong labour market across the Tasman and the lure of an overseas experience will continue to remain a strong drawcard for Kiwis. Non-New Zealand resident departures from the country are also picking up (to 46,600 annually) as New Zealand’s lure as a place to live and work fades.”
Praneeta Mahajan is an Indian Newslink reporter based in Hamilton.
