Mark Lister, 7 August 2017

Migration continues to break records, bringing with it a whole lot of positives as well as a similarly long list of challenges. Over time, these high levels of inbound migration are expected to fall back to more normal levels, or even reverse (temporarily) at some point. However, with policy changes from the likes of Australia and the United Kingdom, maybe those traditional destinations won’t be the drawcard for Kiwis they once were. Should that be the case, the migration boom could be here to stay a little longer than previously thought.

Migration continues to break records
In recent months we’ve seen net migration hit an all-time high of close to 72,000 people a year. That’s even stronger than the previous three years, which were also recordbreaking. In the preceding fifteen years, annual net migration averaged just above 10,000, so you could say that at the moment it’s running at several times the historic norm.

Net migration of 72,000 a year is substantial, especially when you consider that we are still a very small country in terms of our overall population. Our total population is currently estimated to be 4.8 million, so the current level of migration represents an increase of around 1.5% per annum.

The natural population increase has been around 30,000 per year in recent times (on average one birth every nine minutes, and one death every 17 minutes). Add the impact of migration and you have a population that is growing by approximately 2.2% each year, the strongest population growth since 1962.

It’s not just that more people are arriving, it’s also that much fewer are leaving
In the chart below, the grey shaded area represents overall net migration. It is quite clear that the strength of the last three years has been phenomenal, but the two coloured lines tell an equally interesting tale.

The blue line represents non-New Zealand citizens. While there has been a steady stream of people settling in New Zealand over the last 20 years, we can see that since 2013 the number of arrivals has risen strongly. This has been a key driver of the overall migration story, although not the only one.

The gold line represents the net movement of New Zealand citizens, and as it moves lower it reflects less Kiwis leaving the country.

Historically, a reasonable number of New Zealanders have left the country each year. This has often off set the non-New Zealanders coming in, keeping net overall migration at modest levels. On occasion, such as from 1998 to 2001 or during 2012, net migration has registered an outflow because of large spikes in people leaving.

What is very clear in this chart is that over the last few years the number of New Zealand citizens leaving the country has fallen drastically. It is now only 1,500 per year, much lower than what we have seen at any other point during the past 20 years.

In summary, it is obvious that the drivers of strong net migration are two-fold. On the one hand, we are a very popular destination for citizens of other countries, but the fact that virtually nobody is leaving at the moment has exacerbated the overall impact on migration figures.

Annual net migration

Net migrants

What sort of impact is the weak Australian economy having?
While those arriving from Europe, Asia and elsewhere are definitely contributing to the trend, we can lay a fair amount of the blame for our current popularity at the feet of Australia.

Traditionally, a large number of Kiwis have headed over the ditch every year. Since the late 1970s we’ve lost almost 20,000 people on average each year to the ‘lucky’ country. In the lead up to the global financial crisis when the mining boom was in full swing, at one point it was closer to 40,000 a year.

But that has all changed over the past few years, and with the grass no longer any greener, people are staying put.

This year the gain in people from Australia has been at its highest level since the mid-1980’s. About two-thirds of migrant arrivals from Australia were New Zealand citizens, so there are clearly numerous expats coming home as well.

Australia is a much bigger country and has always offered attractive job prospects, particularly for bluecollar workers. Wages are higher and workers in many industries experience better conditions.

If their economy was in better shape and their political backdrop more stable, those traditional drawcards might be more alluring. However, New Zealand looks stronger than Australia on most measures today, so we are a victim of our own success to some degree.Where might migration levels go from here?
Few people predicted that migration levels would remain as strong as they have, and for quite so long. It has taken most economists by surprise, as well as the Reserve Bank of New Zealand and most Government agencies.

In 2014, when annual migration was sitting at about half of today’s levels, the Treasury was expecting annual net migration to rise to 38,000 before falling back to the longrun assumption of 12,000 in 2017. The opposite has happened, with migration more than doubling since then, rather than falling by two thirds.

Today, the Treasury is expecting net migration to add 212,000 people to the population over the next four and a half years, before falling back to an annual pace of 15,000 from 2022.

If we assume the natural population increase continues at the same pace, in four and a half years’ time New Zealand will have a population of more than 5.1 million, and there will be approximately 7.2% more of us than there are today.

Furthermore, those assumptions from the Treasury could well prove conservative. If net migration continues at its current pace, the estimate over that period could be light by 100,000 people.

What does this mean for the economy and financial markets?

Strong migration is certainly boosting our economy in a significant way. The most recent gross domestic product (GDP) figures again highlighted the impact
of population increases on growth, with GDP per capita for the year to March 2017 at just 0.9%, well below headline GDP growth of 2.5%.

This can be seen in the chart below, with per capita growth lagging well below headline economic growth.

Annual economic growth

An increasing population boosts activity and many domestically focussed businesses (both large and small) will be seeing benefits from an increasing pool of customers.

However, there is no shortage of corresponding challenges and negative spin-offs. The housing problems are well documented, while the infrastructure limitations that started in Auckland seem to be spreading to other parts of the country.

While migration is partly to blame for minimal wage growth, workers arguably benefit from greater job security as businesses are in a stronger position.

At present, New Zealand is a highly attractive place to live. The economy is strong, we have a stable government, unemployment is low, and we are far away from the uncertainty and tension facing many parts of the world.

Further policy changes are possible to stem the flow of migrants, which could see numbers drop closer to historic norms. Having said that, many have predicted that change for some time and have been proven wrong, and our attractiveness has only grown. For the time being, the current dynamic looks here to stay.

Please note: This article was first published in the August 2017 edition of News & Views. Craigs Investment Partners clients can view the latest edition of News & Views, which includes the full version of this article, by logging in to Client Portal.