This is a re-post of the Special Topic in the Treasury's Monthly Economic Indicator report.
- The Treasury has recently reviewed its forecast of net migration. We assume annual net migration to fall from 68,000 in the year to March to 25,000 in the year ending June 2022.
- Our current net migration assumption for 2022 is 10,000 higher than in the Half Year Economic and Fiscal Update 2017.
- The upward adjustment feeds into higher demand in the economy. This motivates increased investment in residential housing and for businesses to invest and hire additional staff.
This special topic presents and explains the Treasury’s latest forecast of net permanent and long-term migration.1
The special topic is in four parts. The first provides a summary of the migration landscape broken down by flow direction, visa type, and citizenship. The second part highlights the need for revising our latest migration forecasts. This part also presents the forecasts of Statistics New Zealand, Ministry of Business, Innovation, and Employment (MBIE), Sense Partners, as well as the Treasury. The third part presents the current projection for net migration and explains the logic behind it. The final part summarises the possible implications for our forecasts of other macroeconomic variables.
Where is net migration now? What is driving net migration?
Net migration started in the past few months to taper off after the record high of over 72,000 in the year ending in July 2017 (Figure 13). Net migration consists of four key flows - arrivals and departures of non-New Zealand citizens (Figures 14 and 15) as well as arrivals and departures of New Zealand citizens (Figures 16 and 17).
The complex composition of net migration partly explains why it is highly cyclical, and hard to forecast.
Figure 13 - Annual net migration
Source: Statistics New Zealand
Departures tend to increase with arrivals as a portion of recent arrivals eventually leave the country (Figure 14). The impact is lagged by around 2-3 years, in line with the time limits on many visas.
Figure 14 - Annual non-New Zealand citizen
Source: Statistics New Zealand
Arrivals of non-New Zealand citizens by visa type (Figure 15) show that student visas have levelled off after pulling back from their peak. This is largely due to the tightening of English standards at the end of 2015 as well as the crackdown on illegal migration practices and fraudulent education providers.
Arrivals on work and resident visas show some signs of peaking with annual arrivals falling slightly over the past couple of months.
Figure 15 - Annual non-New Zealand citizen Arrivals by visa type
Source: Statistics New Zealand
Since 1980, net migration of New Zealand citizens has remained in negative territory ie, a net outflow (Figure 16). Most of the citizen flows are trans-Tasman (Figure 17). Comparing figures 16 and 17 reveals that most of the movements in annual citizen net migration are driven by the highly volatile outflow of New Zealanders to Australia.
Figure 16 - Annual Trans-Tasman and total net New Zealand citizen migration
Source: Statistics New Zealand
As the mining boom lost momentum, New Zealand citizen departures to Australia sharply declined over 2013-2016 and have been stable at around 20,000 since then. The net flow of New Zealand citizens to and from countries other than Australia has been broadly stable since the early 2000s, but there is now a slight net inflow, offsetting the slight increase in the outflow to Australia (Figure 17).
Figure 17 - Annual New Zealand citizen flows by country of origin and destination
Source: Statistics New Zealand
Why do we need to revise our migration forecast? How do the forecasts of other institutions compare to ours?
Our previous forecasts relied on the assumption that future outturns of net migration revert back to the historic long term average sourced from Statistics New Zealand median population projection. As net migration continued trending upwards (Figure 13), albeit cyclically, our forecast of net migration was consistently below the outturns (Figure 18).
The continued improvements in New Zealand’s educational system, work conditions, and overall economic atmosphere, led us to believe that arrivals would be permanently higher relative to their long-term average. In other words, net migration will continue trending upwards in the long run. These factors motivated the Treasury to review the migration forecast using other methods.
Figure 18 - Treasury’s historical forecasts of annual net migration2
Source: New Zealand Treasury
There is no consensus regarding the optimal method for forecasting migration. Each method has a different purpose. Figure 19 plots some of the forecasts of several institutions including the Treasury. Sense Partners forecast is based on the average of five models that account for the economic drivers of migration such as wage differentials and real exchange rates.3
Statistics New Zealand projections are based on the long-term average of historic net migration. The projections are updated every three years. MBIE’s forecast is updated quarterly and relies on certain assumptions about the future movements in the component variables of net migration as well as their historical trends.
Figure 19 - Annual forecasts of net migration by institution
Sources: Statistics New Zealand, MBIE, Sense Partners, and the Treasury
What is the current migration forecast?
The Treasury forecasts net migration to reach 25,000 by June 2022. Our current end of period forecast is 10,000 higher than forecast in HYEFU 2017 (Figure 20).
Figure 20 - BEFU18 vs. HYEFU17 net migration forecasts
Source: The Treasury
Due to the recent trends in net migration (Figure 13), we expect net migration to gradually decline within the forecast horizon, but not to long-term averages. On the other hand, we believe the forecast of Sense Partners may be a little too strong. Our best judgement is that net migration will lie between the forecasts of Sense Partners and the projections of Statistics New Zealand.
Departures of non-New Zealand citizens have driven the fall of net migration over recent months. We expect this outflow to increase as some of the record high arrivals of non-New Zealand citizens in recent years start to leave. We expect non-citizen arrivals on work and resident visas to decline in the medium run compared to their current levels. Data in 2018 show modest declines in resident and work visas.
There is a large degree of uncertainty surrounding the flow of New Zealand citizens to Australia. Relative economic and labour market conditions remain important in driving trans-Tasman flows. We anticipate an increase in New Zealand departures to Australia but not to the extent seen recently.
What do the changes for migration assumptions mean for other variables?
The new migration forecast assumption adds almost 20,000 net migrants over the forecast period relative to HYEFU 2017, mostly in the latter years. The increase in population feeds into higher house prices, which boosts growth through higher consumption (wealth effects) and residential investment. The increase in residential investment results in more hiring and stronger business activity. The changes to our forecasts due to the change in migration assumptions are fairly small.
Notes
- 1. This note refers to “permanent and long-term migration” where the migrant stays or intends to stay for 12 months or longer.
- 2. BEFU stands for Budget and Economic Fiscal Update. HYEFU stands for Half Year Economic and Fiscal Update.
- 3. Sense Partners study was commissioned by the Treasury to provide alternative population and migration forecasts. The report is available here.
This is a re-post of the Special Topic in the Treasury's Monthly Economic Indicator report.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.