Economic fortune swings with declining migrant numbers

Satish Ranchhod

New Zealand has experienced a massive migration boom.

Flows of people into the country have been running hot for several years now, including large numbers arriving on temporary work and student visas.

We have also seen higher than usual numbers of New Zealanders choosing to stay onshore or come back from overseas.

Together, these conditions have resulted in an extended period of strong migration, with the annual net inflow of people rising to a record high of 72,500 in July of this year.

Good economic conditions

The big factor underlying the recent strength in migration has been New Zealand’s favourable economic conditions.

Compared to many other regions, including Australia, New Zealand has enjoyed a fairly positive run of economic activity in recent years.

We have also been more politically stable than countries like the UK, adding to New Zealand’s attractiveness as a destination.

Strength in net migration has seen population growth surge to rates of over 2% per annum in recent years.

The migration-related increase in demand has also been particularly important in the housing market, with population inflows adding to the demand for both rental and owner-occupied housing. This boost to demand has been spread across the country and reflects not only the strong lift in arrivals, but also the larger-than-usual number of New Zealanders staying on shore in recent years.

Productive capacity boost

It also adds to our productive capacity. And it is particularly important for helping us source the skilled labour necessary for our growing economy.

During the current migration cycle, inflows have been weighted towards those of working age. Since the uptick in migration began in late 2012, we have seen the unemployment rate fall from 6.7% to 4.6%.

Striking a balance between these competing demand and supply considerations has been at the heart of the recent debates on migration, and the political consensus on where that balance lies has shifted following the general election on September 23.

Moving figures

Monthly departures of non-New Zealanders have risen by 30% over the past year, and with a very large number of arrivals in recent years, we are likely to see a proportionately large ‘echo’ of departures going forward.

At the same time, new arrivals have been declining, with monthly inflows already down 10% from their peak. And with the global economy improving, we expect that these numbers will continue to soften.

In fact, even before the general election we were factoring in a drop in arrivals of around 30,000 people over the next few years.

Now, with policy changes likely to put a further brake on arrivals, the downturn will be even more stark – we have pulled down our forecast for arrivals by a further 12,000 people. This additional policy related change to our forecasts is smaller than the Labour Party’s assumed estimate.

Reduction in GDP

The slowdown in net migration that is underway will see the rate of population growth slow from 2.1% currently to 0.8% over the coming years. That signals a huge reduction in the economy’s rate of potential GDP growth, and is a key reason why we expect lower GDP growth over time.

This will have significant impact on the economy.

First, it will remove an ‘easy’ source of demand growth that businesses have enjoyed in recent years. It is much easier to increase revenues in an environment where the population is expanding rapidly.

For many businesses, particularly those that sell consumer items like home furnishing, slower population growth over the next few years will be a significant drag.

Weakening house prices

Lower migration is one of several upcoming policy changes that we expect will result in very weak house price inflation over the coming years.

It will also reduce the upwards pressure on rents.

In terms of the construction, we will not see the same sort of large increases in demand that we have in recent years.

In Auckland, demand for housing will remain strong.

However, it will be a very different story in many other regions that are not wrestling significant shortages of housing.

In some regions slower population growth could mean that construction levels fall over the coming years.

Impact on human capital

The fall in migration will reduce the pool of available workers in some industries, with a related lift in wage pressures. However, with the new Government looking at a targeted tightening of migration settings, impacts will be varied across sectors.

We are likely to see fewer unskilled workers arriving over the coming years, which will be particularly important in areas like hospitality and retail.

With the global environment improving, many businesses will still find it tough to attract highly skilled staff.

Satish Ranchhod is Senior Economist at Westpac Bank based in Auckland. The above is an edited version of his original analysis, which can be accessed at www.westpac.co.nz

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