Tightening migration policy would constrain New Zealand's economic growth by causing labour shortages in key areas, says economic analysis company Infometrics.
The company's latest forecasts, released today, predicts that slower near-term growth in construction activity and household spending would see GDP growth slip below 2.0 per cent per annum this year.
Infometrics chief forecaster Gareth Kiernan said although growth was forecast to rebound during 2018, that was contingent on the continued supply of labour provided by foreign migrants coming to New Zealand.
"High levels of immigration have undoubtedly contributed to stresses around infrastructure and the housing market, particularly in Auckland," Kiernan said.
"But employment growth of more than 1 per cent per quarter over the last 18 months demonstrates the need for workers across the economy."
Without these inflows of foreign workers and returning New Zealanders, businesses would have struggled to meet growing demand and cost pressures would be even more intense in sectors such as the construction and tourism, he said.
With a general election looming and many parties favouring further reductions in migration, Kiernan warned that a large drop-off in net migration would have negative repercussions for economic growth during 2018 and 2019 due to higher labour costs.
The inflationary risks associated with such cost pressures would also be likely to compel the Reserve Bank to raise interest rates sooner than would have otherwise been the case.
"Given the slowdown already occurring in sales activity and house price growth, this potential cocktail of rising interest rates mixed with a government clampdown on migration would be lethal," said Kiernan.
Infometrics believed the "surge" in migration over the last four years could have been more carefully managed, thereby preventing the housing market imbalances from becoming as critical as they had.
Although net migration was expected to gradually ease over the next five years, a cautious approach was needed to avoid replacing one lot of economic problems with a completely new set.
"Ultimately, high migration levels are a positive reflection on New Zealand's economic performance," Kiernan said.
"We've been able to attract and retain workers in this country because our growth over recent years has outpaced that in other developed economies."