You might argue a smart immigration policy would be set so arrivals have skills in areas where we are still struggling to find people. Photo / Greg Bowker
OPINION
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If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
Q: Unemployment has just reached its highest level in three years. At the same time, record numbers of immigrants are arriving (even, I think, with record outward migration to Australia). Won’t that just make our unemployment numbers worse? - DW
A: It could, is the short answer. Intuitively it seems like more people entering an already tight labour market must mean fewer jobs to go around. But there are a couple of mitigating factors.
First, we should remember that there are layers of nuance beneath any top-line economic numbers. Despite slowing employment growth and rising unemployment there are still some industries with acute worker shortages - teaching, healthcare, policing and horticultural work to name a few.
Ideally, if our immigration policy is set correctly those coming in should be doing so because they have skills in those areas we are still struggling to find. It’s not an easy thing to get right though because changing policy takes time and then it takes even more time for those changes to work through the visa scheme and for people to pack up their lives and move here.
So sometimes things get out of whack because the labour market can change fast. The construction sector was short of workers two years ago, now its building has slowed down and there is an excess of construction workers.
But economists expect that the downturn - both in construction and the border economy - should soon start to deter potential immigrants and we’ll see arrival numbers fall.
Arrivals have been at record levels so there are a few more months to go before it all gets back into balance I suspect.
Secondly, we shouldn’t forget that bringing more people into the country also boosts the economy and creates jobs. New immigrants have to live somewhere and eat. They get sick and their children need to go to school. Hopefully, they also get some time to relax and enjoy hospitality and entertainment.
Given how bad our GDP is on a per capita basis you could certainly make the case that we’d be in a much deeper recession right now - with unemployment rising even faster - if we didn’t have net positive migration across the past two years.
To sum up, immigration is a balancing act and a very difficult one for policymakers to get right because of time delays. Some economists argue that running high net migration has become a short-term economic fix for governments and that it doesn’t boost productivity or the overall wealth of the nation.
Commentators - like sociologist Professor Paul Spoonley - have argued for a bipartisan approach to policy setting, with long-term targets for population growth set at a steady, manageable level.
Seems sensible to me.
Behind the numbers
As it happens, Kiwibank senior economist Mary Jo Vergara has just published a deep dive into New Zealand’s big surge in net migration this past year or so.
The report titled At the border: Volume I - Mammoth migration is more than a Covid catch-up, notes that 2023 was the year of a “record-breaking, head-scratching, heart-palpitating surge in migration”.
At its peak, in the October 2023 year, arrivals exceeded departures by 142,000.
“We are now at a turning point,” Vergara says.
“Initially, we put down the 2023 migration surge as a Covid catch-up. But the strength in the data has thrown that theory out the window.
“Instead, the numbers are playing out as a resumption of the 2014-2019 migration boom; the boom interrupted by the unprecedented border closure in 2020. We have upgraded our forecasts, and now expect a gradual decline to 40-50,000 over the medium term.”
Most migrants in the big surge arrived from India, the Philippines and China, Vergara notes.
“And it’s in our largest cities that they establish their new lives. It’s no surprise that these regions have also recorded the largest increases in employment and consumption.”
At the outset, the current migration boom was more disinflationary. Strong migration helped to cool the labour market.
But the demand effects, with rising rents, were now beginning to emerge.
“There’s a demand and supply force to migration,” Vergara says. “In the current boom, the supply-side influence has been the dominant force. High inflows have boosted the productive capacity of the economy. The influx of migrants is helping to cool wage pressures. And the disinflation is especially strong given the tightness in the market to begin with.
“On the demand side, consumption has been soft despite rapid population growth. Because migrants are arriving in a recession,” Vergara writes.
The return of migrants also coincided with a sharp lift in remittance outflows, in other words, migrants are sending a portion of their wages “home”, spending less here.
“The current migration boom has simply generated less inflationary pressure than expected,” she concludes.
“That said, rental inflation has surged to an all-time high which frustrates the inflation outlook. Taming domestic inflation is key in ensuring overall inflation returns to the RBNZ’s [Reserve Bank of New Zealand] 1-3 per cent target band.”
So if immigration were to remain elevated it could prove a headache for the Reserve Bank... and those of us waiting for inflation and interest rates to fall.
If you are tired of waiting for inflation and interest rates to fall, you are not alone. It seems like the whole world is watching, waiting and worrying with you.
On Sunday, I wrote a column about the painfully long process and the unreliability of market speculation over when central banks will start cutting interest rates.
At the start of this year, US debt markets had six 0.25 per cent rate cuts priced in this year. By the middle of last week, expectations had turned so gloomy (ironically because of US economic strength) that rate cuts this year were off the table and there was talk the US Fed would start hiking again. In my Sunday column, I noted that even though Fed Chair Jerome Powell’s speech was bad news compared with his last one, it was better than expected. So Wall Street treated it as positive news and shares rose.
Well, since I wrote that, new US jobs numbers have landed which point to more of an economic slowdown than expected. Employers added 175,000 positions in April, the Labour Department reported on Friday, undershooting forecasts. The unemployment rate ticked up to 3.9 per cent.
So that was treated as even more good news by markets, which are now busy pricing in at least one, maybe two cuts... again.
I suppose that eventually rates will be cut and market expectations will be met. But the past week of market moves is a reminder that long predictions are little more than guesswork right now.
One of the reasons central banks need to get on top of inflation is that if the embers are allowed to burn at moderate levels for an extended period, we risk copping a major flare-up when we inevitably face the next global supply shock.
With climate change bringing more extreme weather events, the risk is heightened. Cyclone Gabrielle sent local fruit and vegetable prices through the roof, driving up domestic inflation last year.
But grocery shoppers may also have noticed rises in coffee, cocoa and olive oil prices, which have all spiked in recent months due to extreme weather events in major growing regions.
Wholesale coffee prices have risen more than 20 per cent since January, after crops were hit by extreme weather in key producing countries, including Vietnam and Brazil, the Herald reported last week.
Prices have also been fuelled by increasing demand from a growing middle class in China and the rest of Asia.
Fortunately, coffee price only accounts for a small percentage of a flat white in a cafe. Unfortunately, milk, rent, rates, power insurance and labour costs make up the rest of the price... and they’re all up too.
Meanwhile, cocoa prices rose a staggering 200 per cent this year, due to El Nino weather hitting growers in Africa.
After hitting a peak in late April, they’ve since slumped about 30 per cent and hopefully, the worst of that peak won’t flow through to local chocolate prices.
Again, apart from high-end dark chocolate, cocoa only accounts for a fraction of the cost involved in making a standard commercial chocolate bar.
Olive oil, on the other hand, is (for the most part) a bulk commodity. The price of the oil transfers very quickly to the retail price.
That’s why we’re already paying twice as much as usual for a one-litre bottle - nearly $30 for a litre of Olivani after extreme heat and drought hit production in Southern Europe.
Spain in particular has seen a production slump.
CNBC reports that Spain supplies more than 40 per cent of the world’s production and typically produces between 1.3 million to 1.5 million metric tons of olive oil each harvest.
“However, official figures showed Spain only cultivated around 666,000 metric tons for the 2022/2023 campaign. Market players surveyed by Mintec expect a production range of 830,000 to 850,000 metric tons for Spain’s 2023/2024 season, an increase of roughly 40,000 metric tons from previous estimates.”
Sadly, it doesn’t sound like the price will be falling fast.
The OECD has released its latest deep dive into New Zealand’s economic status. The report - to put it bluntly - states the bleeding obvious.
New Zealand needs to get out of debt, improve productivity, boost education outcomes and broaden its tax base.
The OECD argues the Government should not borrow for tax cuts - saying they must be fully funded. I’ve made the same points in the past few years.
To be fair, the new Government has also put the spotlight on these issues and hopefully will put policies in place to make some improvements.
However, the OECD report did come with a warning ahead of the Budget on May 30.
The OECD argues the government should not borrow for tax cuts, saying they must be fully funded.
Whether this was a dig at the current Government’s plan to adjust tax brackets (while the Crown accounts are still in deficit) depends I guess.
The Government argues any cuts will be fully funded because spending cuts offset them.
But despite the spending cuts, the Government now expects it will take a year longer than planned to get the books back into surplus. That effectively means more borrowing.
To quote independent economist Cameron Bagrie when asked (on RNZ’s Morning Report) to explain the Government’s logic: “I’m scratching my head.”
Me too Cam.
The OECD also recommended we need to broaden our tax base. We have an ageing population which means future governments will preside over a population that delivers less income tax revenue and costs more in superannuation payments. Something has to give. The OECD, suggests we need... wait for it... a Capital Gains Tax.
Fat chance of that, of course. Even though almost every economically successful country in the world has one of these taxes and most economists are in favour, this is a dead duck of a policy in New Zealand.
I suppose, given I’m often arguing for a more bipartisan approach to big policy issues (like infrastructure and immigration), I should be pleased that both the major parties are aligned.
I’m not going to dive into the full argument for a tax on capital gains here, but I’ve noticed many reader comments to the effect that we can’t afford to pay any more tax.
So I’ll just make the point that the Capital Gains Tax plan - as put forward by the Michael Cullen Working Group - was designed to be revenue-neutral. In other words, the new tax revenue it brought in would have been offset by sizeable income tax cuts. That sounds good to me.
Tax, in my view, should be as low as possible, as efficient as possible and it should incentivise hard work, innovation and wealth creation.
In a recent column on our relatively poor economic performance compared to Australia, I brushed off Australia’s mineral wealth as a reason for the disparity. I looked through it primarily to put the focus on less resource-based issues - like the Australian tax and savings regime.
But in response, Patrick Phelps from Minerals West Coast makes a strong case for mining being the biggest reason for wealth disparity - and outlines his argument for extracting more minerals in New Zealand.
“Mining is indeed Australia’s largest sector,” he writes. “In 2023 it accounted for about 14.3 per cent of the country’s GDP. In New Zealand, it is the smallest sector and accounted for merely 0.75 per cent of GDP in 2023.
“This means mining’s economic contribution in Australia is (proportionally) 19 times greater than in New Zealand. Having analysed both countries’ figures, no other disparity comes close. Agriculture, forestry and fishing make up about 5 per cent of New Zealand’s GDP, but only 2.5 per cent of Australia’s - a 2:1 difference. But 19:1? That is a structurally different economy.”
Fair enough. But given competing demands on our much smaller land mass - for agriculture and tourism - I’m not sure there is much capacity for mining to help us catch Australia’s economy.
I still think reforms to our savings schemes and tax policies offer the lowest-hanging fruit.
Speaking of minerals, the Market Watch video show takes a look at reasons for the big surge in gold prices this year. Turns out it’s all connected to interest rate outlooks, the US dollar and a wobbly Chinese property sector.
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.
If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz... or leave a message in the comments section. He’ll try to answer in Inside Economics, a new column published every Wednesday.
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