Immigration boom: What record arrivals mean for economy - more inflation or less?

Will record migrant arrivals drive growth? Photo / Andrew Warner

Economists say this year’s record immigration boom is likely propping up the economic demand and putting a floor under house prices as well as helping ease Labour shortages.

But despite annual net migration hitting a historically unprecedented 110,000 in the year to August, the extent to which it could add to inflation (and potentially keep interest rates higher for longer) is not yet clear.

High net immigration would have both “demand- and supply-side” implications for the economy, said ASB senior economist Mark Smith.

“The strong net immigration impulse should support domestic demand but high borrowing costs (which look set to move higher still) are blunting the impact on the housing market,” he said.

Meanwhile, the “labour supply rich” composition of immigrants was boosting productive capacity by alleviating labour market frictions, he said.

Annual migrant arrivals reached an all-time high of 225,400 in the August 2023 year, Stats NZ figures showed.

But migration across the border surged in both directions.

There were 115,100 migrant departures - just below the annual record of 117,400 in the February 2012 year.

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

There was also net migration loss of 42,600 New Zealand citizens in the latest data, approaching the record loss of 44,400 in the February 2012 year.

Stats NZ’s latest figures (for the year to March) indicate about 53 per cent of those Kiwis headed to Australia.

They indicated a provisional net migration loss of 17,600 people to Australia in the year ended March 2023.

This was made up of 20,800 migrant arrivals from Australia to New Zealand, and 38,400 migrant departures from New Zealand to Australia.

For the year to August data, citizens of India, the Philippines, China, Fiji and South Africa drove the net migration gains.

Net permanent long-term inflows are expected to continue to remain historically high over the next few months, said Smith.

“Historical revisions should remain upward, boosting the starting point. We then expect the pace of inflows to subside, as the slowing economy reduces the attractiveness of New Zealand as a migration destination and the backlog of people wishing to migrate to New Zealand abates,” he said.

“However, we are mindful that [a] persistently strong net immigration boost will have implications for the economic and domestic interest rate outlook.”

Even if net arrivals remained around the levels seen in recent months, and assuming no material revisions, the annual net inflow was likely to rise a little further over the next two months to a peak of around 115,000, said Westpac senior economist Darren Gibbs.

That was 25,000 more than Westpac had assumed as recently as its August Economic Overview.

“To date the inflow seems to be helping to alleviate tightness in the labour market – helping to explain reports of record applications for the jobs on offer – while also underpinning a lift in house sales, prices and especially rents. How these competing influences on the economy and inflation continue to play out will have a bearing on the required level of interest rates over the year ahead. Given the increasing size of this flow, understanding the economic impact has become more important than ever.”

ASB has previously flagged the risk that the current migration boom will place much less upward pressure on medium-term inflation than is historically the case.

“However, we expect the RBNZ to take out insurance and to retain restrictive OCR settings, and while the OCR may still move higher from here, it will not be moving lower for a while yet (we have pencilled in cuts from early 2025),” Smith said.

After a huge surge in arrivals in the months after the borders opened, the net migration rate has hit a new annual high every month this year and probably will continue to for several months yet.

In February and March, monthly net migration gains were in excess of 13,000 and 14,000 respectively.

On a monthly basis, the numbers have settled back to more moderate levels but estimates for August 2023 still show a net migration gain of 9500, up from 8161 in July.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.