IMF sees heightened risk of overheating economy

Rapid gains in house prices could be reignited, the IMF has warned. Photo / Mike Scott

The International Monetary Fund sees a heightened risk of New Zealand's economy getting too much of a lift from migration or strong terms of trade, which could overcook growth and reignite rapid gains in house prices.

The global body of 189 member countries, set up to foster international monetary cooperation, today released its formal report on New Zealand's economy, having given a preliminary assessment in March. The IMF is relatively upbeat about the state of New Zealand's economy which had been underpinned by low interest rates, a booming construction sector, strong migration and improving terms of trade.

However, the international agency noted a growing risk that New Zealand's record migration or stronger terms of trade could lead to overheating growth in the short-to-medium-term, pushing up house prices and increasing vulnerabilities in the economy. The IMF rated that risk a medium likelihood and said a policy response to reduce the impact would need faster fiscal consolidation, tighter monetary policy and potentially macroprudential tools.

Among the IMF's policy recommendations that were flagged in March, the agency encouraged targeting housing supply bottlenecks as a means to ensure highly skilled migrants still want to come to New Zealand, which would help the nation overcome its distance from the rest of the world and small market size.

"The IMF notes that the New Zealand economy is more resilient than in the past, specifically referencing our lower current account deficits than in previous periods of expansion," Finance Minister Steven Joyce said in a separate statement. "It also notes that New Zealand is benefiting economically from its current growth in population."

The IMF report projects New Zealand's population reaching 5 million in 2021 from 4.6 million in 2016. In a breakout chapter on net migration, the international agency noted the recent net inflow since 2013 was driven in part by the weakness of the Australian labour market relative to New Zealand's strong job opportunities when the Canterbury earthquakes stoked economic activity, at the same time as the country attracted strong international student numbers.

The report said recent labour market developments suggested conditions in Australia haven't been the main driver of the current migration wave, and that "the over impact on the economy is consistent with the notion that demand effects are larger". Still, a gradual slowing in net migration is expected to depend in part on Australia's jobs market improving, otherwise "upward pressure on net migration from that source is likely to remain".

Strong migration has become a political football heading into the general election in September, with opposition parties promising to cut the number of new migrants, claiming the expanding population hasn't contributed to faster economic growth, pointing to slow per capita gains in gross domestic product, while putting greater stress on infrastructure. The government has responded, tightening up criteria for some work visas and announcing plans to beef up capital spending over the next four years.

However, the IMF report says migration has a positive economic impact with the increase in employment and capital stock increasing output by nearly 1.5-to-2 per cent for every 1 per cent increase in population from net migration, drawing on data from a sample of OECD nations.

"The results show no evidence of crowding out of domestic labour, with hours worked and employment responding positively, and no decline in average hours per worker" and while there are short-term hits to productivity, those don't appear to be significant.

New Zealand differs in that net migration has waxed and waned in waves, which the IMF report says could affect how quickly the country adjusts, such as undermining short-term employment and investment if a rapid inflow quickly reverses.