NZIER’s quarterly business survey shows confidence fell further in the third quarter to its lowest level since 2009. Businesses face rising costs and remain cautious about their ability to pass these on to consumers. Surveyed firms reported a further deterioration in profitability.
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Alongside business confidence surveys, a range of economic indicators provides another way to assess the economy’s future direction. ANZ recently highlighted that slowing net migration could affect the momentum of economic growth.
Net migration is trending downwards
According to ANZ’s New Zealand Weekly Focus, New Zealand recorded a net migration gain of more than 300,000 people over the past 5 years, since mid-2013. This increase is equivalent to more than 6% of the current total population.
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There is no doubt that population growth expands both the supply and demand sides of the economy. Migrants not only add to the workforce but also boost consumption of goods and services, including housing.
However, a turning point came over the past year.
After this cycle of net migration growth reached its peak, the curve began to decline gradually over the following year.
Last year, the net migration gain was only 63,300 people, below the peak of 72400 reached in July 2017.
ANZ expects net migration to decline gradually. Between now and December 2020, migration is expected to add around 100,000 people in total.
By December 2020, New Zealand’s population growth rate is expected to fall from its current 1.9% to 1.2%.
What would fewer people mean for house prices and the economy?
Declining net migration will affect New Zealand’s economy in various ways. The potential effects could be described as the reverse of what has been experienced over the past few years.
Fewer people and lower demand for goods and services would directly hit consumption, with flow-on effects for employment and investment.
On the supply side, a smaller working-age population would also slow productivity growth in the economy.
The housing market is another important area of impact. Historical analysis indicates that, over the past three years, each 1% increase in population has brought a 7%–9% rise in house prices. A range of headwinds is currently affecting the housing market.
These include loan-to-value ratio (LVR) lending restrictions, government policy, housing affordability and financing conditions. Whatever the case, there is no doubt that fewer people mean less demand for housing, with implications for both house prices and residential investment.
Both higher and lower migration bring risks to the economy. However, ANZ’s research report emphasises that, on balance, risks over the coming years are tilted to the downside.