Introduction

Immigration into Australia has collapsed to near zero and is expected by the Government to remain low over the next year. Australian borders are shut for now (except for its citizens and their families). And when borders do re-open many foreigners will still choose to avoid migrating. Concerns about job prospects (as the unemployment rate increases) may also serve to keep the Government’s immigration program depressed.

But lower immigration has implications for Australia’s growth profile. Australia’s high overseas migration intake has been a key driver behind Australia’s solid population growth over the past decade (Australia’s population growth is 1.5% vs OECD at 0.5%). Population growth is one of the “three P’s” that drives economic growth (as measured by GDP) in an economy, along with productivity growth and the labour force participation rate. Lowering Australia’s migration intake will be a negative for near term Australian GDP growth. If the temporary drop in immigration becomes permanent it would also mean lower future potential GDP growth over the longer-run.

Lower levels of GDP growth do not necessarily mean worse living standards for citizens. Living standards are determined by GDP and income levels per person. But changes in potential GDP growth does have implications for inflation and interest rates. We look at the impacts of lower overseas migration on the Australian economy and markets in this Econosights.
Australia and migration

Australia started increasing its overseas migration intake as the mining construction boom took off in 2006. At the time, immigration was one way to plug skills gaps in the labour market. The rise in China’s middle-income population over the past decade has also seen a big lift in Chinese student arrivals. Currently, net overseas migration (total inbound arrivals less outbound arrivals) accounts for 60% of Australia’s population growth (see chart below).

There are pros and cons to running a high migration program. Australia’s highly diverse population (30% of citizens were born overseas compared to 14% in the US, 22% in Canada and 15% in Germany) brings benefits through cultural diversity which is shown to improve corporate performance. Migrant workers can also be utilised for seasonal work (such as fruit picking) which helps to fill labour shortages. The negatives associated with high population growth are around the availability of services (health and education) as well as infrastructure issues (traffic congestion) and housing shortages.

Permanent versus temporary migration

Net overseas migration into Australia consists of permanent and temporary migrants. Permanent migrant visas are capped at 160K/year (the government cut the intake from 190K/annum to 160K in 2019) with the largest share of permanent migrants being those on skilled visas. Temporary migrants make up a larger share, at around 75% of new migrants (see chart below) with no cap on temporary visas. A lot of those people who come in on a temporary long-term visa switch to a permanent visa down the track.

The Australian government expects a 30% fall in net overseas migration over 2019-20 and an 85% decline over 2020-21 (from the 2018-19 numbers). This means that over the year to June 2020 net overseas migration will be ~167K and 36K over the year to June 2021, well below the 240K rise in 2018-19.

While Australia’s international borders are shut for now, international travel will slowly start to resume, firstly through travel between COVID-safe countries, then students and later long term overseas migrants serving out the 14-day hotel quarantine. Overseas migration should eventually recover to its pre-COVID highs, but it may take a few years (depending on how fast the unemployment rate declines). The biggest risks to this view are a permanent change to the Australian migration intake perhaps due to political pressure around higher unemployment, Australian/Chinese trade frictions reducing Chinese student numbers in Australia or a long term structural decline in overseas travel because of concern around the virus (although other pandemics throughout history have not resulted in long-term changes to overseas travel).

Migration and housing demand

New migrant demand is a big driver for housing construction. The fall in the migration intake over 2020-21 will reduce housing demand by around 80,000 dwellings. This means that new housing demand will fall to 124K in 2020 and 118K in 2021, compared to 200K in 2019. Housing construction will also decline (and was already slowing before COVID-19 happened), but won’t fall by as much as demographically driven housing demand (see the chart below). This is because the Australian government’s new HomeBuilder program, which gives grants to eligible applicants for the construction of a new home or for major renovations to an existing property will increase demand for new housing over the next six months (the government expects around 27,000 grants from this scheme).

Higher supply of dwellings relative to demand for housing will keep downward pressure on rents and home prices for now.

Potential GDP growth and interest rates

Potential GDP growth is the growth rate the economy can sustain without generating excess inflation, determined by population and productivity growth. The difference between actual GDP growth and potential growth is the “output gap” or spare capacity which is a driver of inflation. Policymakers aim to generate GDP growth around its potential, to ensure full employment and price stability. In Australia, potential GDP growth is normally thought to be around 2.5 to 3% per annum. In 2020/21, below-potential GDP growth will lead to spare capacity and lower inflation pressures. However, without a permanent reduction in Australia’s migration intake, potential GDP growth will lift to more normal levels as population growth recovers.

A lower potential GDP growth rate means that an economy can sustain a lower level of interest rates which leads to lower bond yields, and vice versa. While we don’t see long-term changes to Australia’s potential GDP growth rate from lower migration, interest rates will still remain at their current lows for a few years because of spare capacity in the economy, as activity will take another year or so to recover to its pre-COVID levels.

Higher GDP growth does not mean necessarily mean better living standards. For living standards, it’s better to look at GDP growth per capita. While Australia’s overall GDP growth has outperformed global peers, per capital GDP growth has not been as solid compared to global peers (see chart below).

Implications for investors

The near-term impact of lower net overseas migration to Australia is lower potential GDP growth. Lower near-term GDP growth will increase spare capacity in the economy, keeping interest rates and bond yields low. Unless there is a permanent change in the government’s migration intake, overseas migration should eventually recover. Travel between “COVID-safe” countries is likely to resume before the end of the year. While the 14-day quarantine is not realistic for tourism; it could be for migrants and students who stay in Australia for longer periods.

The biggest near-term impact from lower migration is on the housing sector which will see a big drop in housing demand, keeping downward pressure on rents and home prices. Other sectors of the economy, like universities, will also suffer from lower student arrivals (education is worth 2% of GDP) and there is a case for the government to increase its support to this area.