Mounting migration means more demand and pressure

A new record of 128,919 people came into the country permanently in the 12 months to the end of October.

Stats NZ data show 245,648 arrived long-term while 116,730 departed – a net gain of 128,919; the biggest recorded in any 12 month period.

Net migration is the difference between migrant arrivals and migrant departures.

The previous long-term average for October years pre-Covid was 120,500 arrivals and 91,900 departures.

The net migration loss of 44,500 citizens in the October year is a new annual record – narrowly exceeding the previous record of 44,400 in the February 2012 year.

Rising migration has prompted an upgrade to Kiwibank’s economic outlook.

Mounting migration means more demand and higher house prices, says Kiwibank chief economist Jarrod Kerr, who expects a shallow recession next year that will feel worse than migrant-inflated figures suggest.

The bank has shaved a few percentage points from its previous estimate and expects the economy to shrink over the December and March quarters, totalling a 0.2% contraction – compared to a previous estimated contraction of 0.4%.

“By the simplest of definitions, it is a ‘recession’ and one of even shorter duration and shallower magnitude,” Kerr says.

But whether or not output runs backwards, the economy is weakening under the weight of the RBNZ’s heavy hand, he says. 

The two faces of migration

The impact of surging migration is two-sided. On the helpful side, the influx of youthful migrant workers is expanding the labour force and dampening wage pressure, Kerr says. 

“The disinflationary force is especially strong given the tightness in the labour market to begin with. Employers were starved of workers. Businesses are more cautious than they were a year ago. But on the other side, more people means more demand. And signs of an increase in demand are surfacing.”

For this reason, Kerr says the bank has lifted its inflation outlook. Inflation has been above the RBNZ’s 1-3% target band since mid-2021. “It’s going to take some time to get back to the 2% midpoint. We’ve seen headline inflation fall from the 7.3% peak to 5.6%. And we expect it to hit ~4.8% by the end of this year.”

For inflation to fall from the 7s into the 6s, 5s and now the 4s – that’s quite a psychological shift, he says.

“But rapidly decelerating imported inflation is doing most of the leg work. Favourable base effects are still in play with last year’s spike in energy and food prices falling out of annual calculations. Cooling commodity prices are also helping to lower the cost of imports.”

Kerr says the tricky part is getting back to the 2% target midpoint. It all hinges on domestic inflation – the stickier, demand-driven kind. And with surging migration, the risks are tilted to the upside.

However, Kerr says the bank is still forecasting the return to 2%, albeit delayed, as the economy continues to cool and the labour market loosens further. “We see inflation back within the band by the second half of 2024. That’s about a quarter longer than we had previously forecast. It’s not until 2025 that we see inflation settling at 2%.”

In the meantime household budgets are being stretched. And businesses now worry more about demand for their products or services, as well as costs. On top of the rapid rise in interest rates, high rates of inflation have slashed household purchasing power and falling house prices have dented confidence and the ‘wealth effect’, he says.

Fortunately, the tight labour market has helped cushion the blow of the housing market downturn. And the surge in migration has led to an earlier-than-expected end to the correction.

House prices have fallen back to early-2021 levels, recording a 17% peak-to-trough decline. There are tentative signs of recovery; sales activity is picking up, and the number of “days to sell” reducing.

Kerr expects house prices to continue relatively modest gains of about 6%.

“The migration boom and the new government’s promise of a reversal to property rules, such as interest deductibility, the brightline test and CCCFA rules, are significant tailwinds to consider. While the surge in migration will add demand to the languishing market,  mortgage borrowers continue to face the steepest interest rates in 15 years – with risk of lifting further – and a forecast rise in unemployment.” Such headwinds will likely cap any house price gains in 2024, he says.