Economy rides a wave of migrants

By BRIAN FALLOW

Immigration was the driving force in the economy last year.

While exporters, who had provided the economy's propulsion in the previous two years, found the going harder, consumers and house buyers, their ranks swollen by immigrants, kept growth trucking along at a clip well above average.



In the year ended November the net immigration inflow was 38,000, about seven times the long-run trend. That inflow made a larger contribution to population than did natural increase - births minus deaths.

There were over 96,000 permanent and long-term arrivals, including returning Kiwis, an increase of 22 per cent on the year before.

At the same time just under 60,000 New Zealanders emigrated, 22 per cent fewer than the year before.

Migrants' transfers contributed $1.7 billion to the balance of payments, and much of that money flowed into the housing market.

Westpac economists noted growth in the "nesting" segment of the population, 20- to 34-year-olds, which was shrinking in the late 1990s and 2000, has returned to mid-1990s levels and they attribute much of the turnaround to migration flows.

Migration also boosted the labour force, easing some skill shortages and keeping wage inflation within manageable bounds.

Even so the labour market delivered 50,000 (2.7 per cent) more jobs in the year ended September, enough to keep the unemployment rate at 5.4 per cent despite the unusually strong increase in the work force.

Add earnings growth of around 3 per cent and you have the basis for the strongest growth in private consumption for two and a half years, and for a buoyant housing market, especially in Auckland.

Quotable Value's house price index rose 8.5 per cent nationwide, and 11.9 per cent in Auckland, in the year ended September.

Is this the kind of boom that presages a bust to come? Westpac's chief economist, Adrian Orr, is among those who think not.

"While house prices have outpaced wage growth over the past two years, the ratio of house prices to income is still significantly below the peak in the last housing cycle and only slightly above its 10-year trend.

"Household debt-to-income ratios remain relatively stable, while debt servicing costs [as a percentage of disposable income] have fallen."

National Bank chief economist John McDermott said that evidence from within the bank was that borrowers were basing their decisions on economic fundamentals rather than expectation of speculative gain.

"It is based on their income, how secure they feel in their jobs, what the cost of the mortgage will be, or in the case of investment properties what the rental income is likely to be and what sort of return on investment that is," McDermott said.

"If we see the world economy recover through the coming year, interest rates will rise and that will rein households in."

Last year the Reserve Bank raised interest rates one percentage point, in effect taking back the "insurance" rate cuts then-governor Don Brash made in late 2001 in the wake of the September 11 attacks.

The year ended with interest rates at a neutral level, providing neither a stimulus nor a constraint to economic activity.

Economists are divided over whether the bank's next move in interest rates will be up or down.

With the economy having grown about 4 per cent last year, while the sustainable trend rate is more like 3 per cent, the resulting pressure on resources would normally be a signal to raise interest rates.

But winds blowing from the global economy may slow things down to a more sustainable rate without the need for higher interest rates.

The world is trudging rather than striding back from the recession of 2001. Growth among New Zealand's trading partners is expected to be stronger this year than last year, but still below par.

And there is enough risk of the international economic environment turning ugly (if a Gulf war-induced oil shock hits a still fragile recovery) for Reserve Bank Governor Alan Bollard to be as likely to have to press the accelerator next as the brake.

The economy is only starting to feel the effects of last year's steep drop in export commodity prices and the rebound in the kiwi dollar.

While there are signs that in world price terms the commodity cycle has bottomed out, the cooling effects of the consequent drop in rural incomes that is already in the bag, so to speak, have yet to work through the system.

As 2002 ended consumer confidence remained buoyant, but business confidence lurched back into pessimistic territory.

The National Bank's December survey found a net 8 per cent of firms pessimistic about the general business situation over the coming year.

But their investment and hiring intentions improved.

Overall business investment increased 4 per cent in the year ended September, a modest increase when economic growth was eating into surplus productive capacity.

This has the Reserve Bank puzzled. Worries about the global environment may be a factor, it suggests.

"Our business contacts have spoken of reluctance to take on significant capacity-enhancing investment because of concerns, either by themselves or their international parent companies, over economic prospects going forward."

The exchange rate was sometimes cited as a concern. "Another possibility ... may be that some New Zealand firms have been concentrating their investment in Australia, given a desire to develop that market," the bank said.

As the year ended the consensus among forecasters was that growth for the year ended March would come in at 3.9 per cent, but would moderate to a still respectable 2.6 per cent in the year to March 2004. That would reflect a slowdown in consumer spending, residential construction and exports.

Consumer spending will be restrained by lower farm incomes - Fonterra has warned of a sharp drop in the payout for the current season.

Much of the past year's consumer spending has been on credit. Household debt at the end of November was 9.1 per cent higher than in November 2001, easily outstripping growth in incomes. That cannot last.

And as for the net immigration which supercharged the economy, Treasury expects to see a marked easing from the second half of this year, reflecting both lower inflows of migrants and a turnaround in the numbers of people leaving as global growth becomes more robust.

It's a good wind that blows nobody any ill.