ASB economists say the current influx of migrants doesn't appear to be adding significantly to demand pressures in the economy - but it is easing the country's labour market shortages

ASB economists say the current surging inbound migration is unlikely to have the same sort of inflationary impacts previous migration booms have had.

In an Economic Note on migration, ASB senior economist Mark Smith and future me graduate Kathryn Shearing say the current influx of migrants does not look like it is significantly adding to demand pressures.

"Even if net immigration inflows remain strong, we suspect the inflationary impacts are unlikely to be as marked or persistent as past booms," they say, adding that there would therefore be "much less upside risk" to Reserve Bank (RBNZ) Official Cash Rate (OCR) settings.

"There is a reasonable degree of uncertainty over how long the high net immigration inflows hold up. Even if the inflows prove to hold up for longer than we (or the RBNZ) expect it does not necessarily mean that the degree of inflationary pressure in the economy is correspondingly higher."

The economists say there are scant signs to date of an immigration boost to demand, with the NZ economy in recession despite booming net immigration.

"Household spending is not showing signs of a net immigration boost. Recent softness in card spending data confirms that 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 in NZ. Dwelling rental inflation, whilst firming, remains reasonably low."

The economists say, however, there are "more conclusive signs" that higher net immigration is boosting productive capacity by "alleviating labour market frictions".

They say they suspect that 5.50% (the current level) could be the peak in the OCR this cycle. 

In terms of exactly why the inflationary impacts of immigration are unlikely to be as strong as has been the case in the past, Smith and Shearing say this likely reflects the composition of who is coming in (typically younger) relative to who is leaving (generally older) that could be mitigating the boost to demand, while also supporting the supply of labour.

"With NZ amid a sizeable per capita recession, the vibe this time around seems considerably at odds with past immigration cycles that had turbocharged the housing market and contributed to economic overheating. We will be doing some further work in this area in the coming months and will report key findings."

As for how persistent the recent migration upswing may be, the economists say "this is the $64,000 question".

"Both the Treasury and the RBNZ assume that the recent surge in net immigration is short-lived. Budget 2023 forecasts have [permanent and long term] PLT net inflows peaking at just over 65,000 persons by mid-2023 and easing to below 40,000 persons at the end of the projection period.

The May [RBNZ Monetary Policy Statement] MPS forecasts have working age net immigration cooling from 75,000 persons in the 2022 calendar year to 48,400 persons by the end of 2024 and just under 40,000 persons by the end of 2025. We broadly concur with these views.

"Forecasting net immigration inflows is inherently tricky, but the most likely trajectory is for net PLT inflows to continue to remain historically high over the next few months. The recent run of upward historical revisions to the figures looks likely, but 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, as the slowing economy reduces the allure of NZ as a migration destination and the backlog of people wishing to migrate to NZ abates. We also expect PLT departures to strengthen over time as the allure of NZ fades to recent PLT arrivals and they look at other options. We expect annual net PLT immigration to cool to around 40,000 persons in the coming years."