Rodney Dickens says we've reached a critical stage in the economic cycle with Wheeler in danger of repeating the mistakes of Bollard & Brash

By Rodney Dickens*

This Raving looks at two migration issues: (1) the role immigration is and can play in easing the burden of an aging population on taxpayers; and (2) the mystery of the missing migration and house price forecasts from the Reserve Bank’s September Monetary Policy Statement that should ring warning bells for business managers, borrowers and investors.

One of the challenges of an aging population

Funding retirement income for aging populations is a major challenge for many countries (i.e. a growing number of retirees relative to the number of taxpayers). The problem is made worse by high government debt levels and fiscal deficits in some countries (see the two charts below). NZ rates much better than many of the large countries on these fronts, but it still has an aging population that will pose challenges.

Thankfully NZ isn’t in the position of Japan that has a much older age structure than NZ (left chart below) and has a falling population versus the current strong population growth in NZ (right chart below). Japan needs to fund ongoing fiscal deficits that keep driving up government debt as a % of national income or GDP in the face of a falling and aging population (i.e. a growing number of retirees who will want to draw down savings rather than fund government debt).

NZ has a long way to go to catch-up with Japan in terms of an aging population, but it is experiencing ongoing aging of the population as shown in the adjacent chart. Based on the Census numbers, between 1971 and 2013 the share of the population aged 75+ doubled from 3.1% to 6.2%.

By contrast, the share of the population aged 0-39 fell from 68.8% in 1971 to 52.7% in 2013. The fall in the percentage of the population either currently in or to enter the child bearing age groups over the next 20 years will contribute to future aging of the population unless birth rates increase miraculously. This is reflected in the annual live births as a % of the population falling from almost 2.2% in 1971 (i.e. 2.2 live births per annum per 100 people) to 1.3% in the 2014/15 June year (i.e. 1.3 live births per annum per 100 people) – see the adjacent chart.

People are living longer on average, which is reflected in the percentage of the population dying each year having fallen from 0.82% in 1971 (i.e. 0.82 deaths per 100 people) to 0.69% in the 2014/15 June year (i.e. 0.69 deaths per 100 people). The fall in the percentage of the population dying each year is more impressive in light of the aging of the population. But while people living longer provides a bit of a boost to the size of the population, it exacerbates the challenge of funding retirement incomes unless there is an offsetting increase in the retirement age.

Immigration can play a part in easing the burden of an aging population

Immigration plays an important part in driving NZ population growth, with the latest surge in immigration driven more by increased arrivals by foreigners than by Kiwis returning from OE, as is normally the case (left chart below). There has been a significant change in the structure of immigrant arrivals as a result of government policy changes, with the key feature being the move to issuing more work visas, while a major recent change has been increase foreign student arrivals (right chart below – “No Visa” immigrant arrivals largely reflects Kiwis returning from OE).

A feature of the immigration numbers has been a trend increase in those aged 20-29 years (left chart above). This will reflect that people in this age group are more likely to migrate and the increase in student immigrant arrivals, but it will also partly reflect government immigration policies. Many of those arriving with student visas will leave, although some will stay permanently, while many of those entering with work visas only have temporary visas and quite a few of these could leave although many are likely to gain permanent residency. I had hoped to be able to delve behind the numbers more to get handles on some of these behaviours, but data limitations didn’t allow me to do so.

But more important than immigration by age groups is net migration by age groups, because that is what helps shape the age structure of the population. The right chart above shows net migration by age groups (i.e. permanent and long-term immigrant arrivals less permanent and long-term emigrants by age groups). In the year end August 2015, migration added almost 27,000 in net to the 20-29 age group (i.e. a 2.3% boost) versus 721 to the 70+ age group (i.e. a 0.2% boost). Not only does this directly help slow down the aging of the population it should also help boost births that means it will provide a secondary brake on the aging of the population.

There are a wide range of issues that could be discussed about immigration, but my focus is on the role immigration can play in helping ease the tax burden of an aging population. Current immigration trends and government immigration policies are going some way to helping slow the aging of the population, but more could be done to use immigration policy as a means of helping fund retirement incomes for Kiwis.

The mystery of the disappearing RBNZ migration and house price forecasts

Migration plays a significant part in housing and economic growth cycles and should be a key factor the Reserve Bank (RB) focuses on in assessing economic growth and inflation prospects, but somewhat mysteriously the September Monetary Policy Statement was devoid of migration and house price forecasts.

Net migration is running well above what the RB predicted in June 2015, while it is running dramatically above what the RB predicted in June 2014 (left chart below). Similarly, house price inflation has already spiked above the peak level the RB predicted in June 2015 (right chart below) and will head significantly higher, as outlined in our Housing Prospects reports. Dropping forecasts for net migration and house price inflation from the latest MPS may partly reflect the RB sidestepping its poor forecasting track record, but I suspect the governor is deliberately trying to take the focus away from two of the key positives, which makes it easier for him to continue his crusade to talk the NZD down on the back of the earlier fall in dairy product prices. When the governor should be focusing on the implications of rising house price inflation and strong population growth as a result of high net migration he appears to be trying to sidestep them, while he plans to add a bit more stimuli to the housing market boom; cheered on by most of the bank economists calling for more OCR cuts.

This should ring warning bells.

Past experience shows that when RB governors fuel major house price booms, aided by high net migration, things turn out very differently from what the RB and bank economists forecast. In my assessment we have reached a critical stage in the economic cycle. Rather than learn from the major mistake Governor Bollard made in 2003 and the large mistake Governor Brash made in 1993, Governor Wheeler looks set to make an equally large mistake that has material implications for house prices, residential building, consumer spending, GDP growth, interest rates and the exchange rate. And as was the case with the Bollard and Brash mistakes, the bank economists aren’t providing warnings about the risks or implications of Governor Wheeler’s crusade to talk the NZ down and his downplaying of what is happening to net migration and house prices. If you want quality insights on these fronts I recommend that you consider signing up for our relevant pay-to-view reports now more than any time.


*Rodney Dickens is the managing director and chief research officer of Strategic Risk Analysis Limited.