Migration scramble not boosting demand

In an economic note, senior economist Mark Smith and graduate Kathryn Shearing say the recent net immigration episode is not sticking to the script.

“It is difficult to discern a demand-side boost from increased net immigration, with the economy essentially flatlining at best, a sizable per-capita recession underway, and the housing market still failing to fire,” they say.

Increased net immigration, says Smith, has coincided with surveyed easing of labour shortages, pointing to a beneficial impact on the supply side of the economy.

The migration policy pendulum is skewed towards increased immigration to plug labour shortages, but this may not always be the case, they say.

“Net immigration is positively correlated to GDP and generally deemed to be a key driver of business cycles. However, there are scant signs of an immigration boost to demand, with the economy in recession.”

Smith says there is a reasonable degree of uncertainty over how long high inflows last. Even if they hold up for longer, it does not necessarily mean the degree of inflationary pressure in the economy is correspondingly higher.

Household spending is not showing signs of a net immigration boost. Recently soft card spending data shows consumer spending is hardly booming.

Likewise, the housing market looks to have troughed, but it’s not setting the world on fire despite more people requiring housing. Consents are easing just as housing demand has surged, which has seen New Zealand’s housing deficit widen again. Dwelling rental inflation, whilst firming, remains reasonably low.

“With NZ amid a sizable per-capita recession, the vibe seems considerably at odds with past immigration cycles that turbocharged the housing market and contributed to economic overheating. We will be doing some further work in this area in the coming months and report key findings,” Smith says.

Surging arrivals the key

Recent immigration to New Zealand has seen strengthening permanent long term (PLT) arrivals, hitting record highs of 20,000 plus people in February and March, but tailing off in April. Most have come from India, China, and the Philippines and tend to be younger than those emigrating. Historically it was the other way around.

More recent data from MBIE show arrival numbers on work visas have remained sizable despite the economy slowing, with more than 20,000 approvals for work visa applications last month. Encouragingly, says Smith, there has been close alignment between incoming migrant skills and the skill gaps in the workforce.

He says there are conclusive signs higher net immigration is boosting productive capacity by alleviating labour market frictions. “A slowing economy is easing the demand for labour, but we also suspect that increasing net immigration is boosting the effective labour supply of the New Zealand economy and helping to plug labour shortages.

“With capacity pressures particularly acute in the labour market, our sense is that the stronger outlook for net immigration should result in considerably less upward pressures on medium-term inflation than is historically the case.

“This will take time to become evident, but we suspect that 5.50% could be the peak in the OCR this cycle.”

Smith and Shearer say forecasting net immigration inflows is inherently tricky, but the most likely trajectory is for net PLT inflows to remain historically high over the next few months.

“In the absence of a sharp reversal in the coming months – which can’t be ruled out – annual net PLT inflows are likely to peak at well under 100,000 persons by the end of the year.

“We then expect the pace of inflows to subside and annual net PLT immigration to cool to about 40,000 persons in the coming years as the slowing economy reduces the allure of New Zealand as a migration destination.”