Accordingly, it saw numbers peaking mid-year, before dropping right off and staying at an average of 40,000 people (net) from 2024 onwards.
Given how wrong Treasury’s December forecasts were, one can confidently say there is a big question mark around where numbers will settle.
The next big question is around the extent to which strong migration will exacerbate inflation - or not.
Treasury is of the view the net effect will be inflationary.
“Net migration will boost the supply of labour, but it will also boost demand for labour by increasing aggregate demand in the economy. The net impact will vary across industries,” it said.
“Some industries will find that the recent surge in migration helps to ease acute labour shortages that have developed in recent times, particularly export industries that do not rely on domestic demand.
“However, our expectation is that the demand boost from migration will slightly outweigh the supply boost when assessed across the whole economy.”
Consequently, Treasury expects unemployment to peak at a lower level than forecast in December and wage growth to be strong.
Westpac chief economist Kelly Eckhold is also wary of the impact strong migration could have on inflation – so much so that earlier in the week he lifted his forecast for where he sees the Official Cash Rate (OCR) peaking from 5.5 to 6 per cent.
The OCR is currently at 5.25 per cent and is due to be reviewed on Wednesday.
“We expect that net migration will rise to an annual inflow of 100,000 people by the end of this year,” Eckhold said.
“That sharp rise in net migration will see population growth rising from just 0.5 per cent at the end of 2022 to 2.4 per cent by the close of this year. That would be the fastest rate of population growth New Zealand has seen in decades, and it signals a large increase in many businesses’ demand base.”
While the larger-than-expected Budget prompted ASB chief economist Nick Tuffley to revise up where he sees the OCR peaking, to 5.75 per cent, he wasn’t convinced a migration surge would automatically be inflationary.
“The Reserve Bank’s traditional thinking on migration’s influence on inflation has been that the demand wave comes before the supply benefit, and to treat a migration boom as something to lean against,” Tuffley said.
“Yet the current circumstances look a little different to past migration booms.
“The supply of people is arriving at a time of strong wage growth and just as employment is set to cool off. And the spending brakes are already hard on in terms of still-high inflation eating into pay packets, high borrowing costs and a housing market that is currently in the doldrums.”
Tuffley concluded the Reserve Bank may stick to its view that migration is inflationary, and hike interest rates more, or keep them higher for longer, in the short term.
“Longer-term, the data will show us how migration is shaping inflation, which will influence the timing and pace of the eventual easing cycle,” he said.
As well as affecting people’s day-to-day lives, inflation materially influences the Government’s books.
In fact, Finance Minister Grant Robertson said it accounted for 79 per cent of the $4.8 billion increase in the Crown’s operating allowance in this year’s Budget.
The hiking of interest rates around the world in response to high inflation is also causing a rise in the cost to the Crown of financing increasingly large sums of debt, all the while lifting the revenue it receives from investments linked to interest rates.
Treasury forecasts the Crown’s net interest expense will rise from $3.1b this year to $4.8b in 2025 and $5b in 2027.
A year ago, Treasury expected this year’s net interest expense to be only $2.4b.
These are big numbers, which reflect one of the many perverse impacts that inflation has on the economy.
Coming back to the uncertainty around immigration, the other question mark is around how effectively it will plug skill shortages.
The Government is allocating a seismic amount to capital investment – the repairing or replacement of cyclone-damaged infrastructure, the plugging of the pre-cyclone infrastructure deficit and the building of more public houses.
The challenge will be executing the plans; ensuring there are enough engineers, builders, materials, etc to enable the money to get out the door and the work to get done.
There are always variables that could affect the state of the Government’s books, as well as its spending plans.
Immigration is the big one at present.
Let’s hope it doesn’t bring too many surprises. We can’t really afford to have the economy get more off-kilter.
