Latest analysis from the International Monetary Fund (IMF) demonstrates migration to Australia does not contribute significantly to inflation, other than in the housing market. The IMF report found generally overall positive effects from the arrival of skilled migrants and overseas students.
As part of its annual member consultations, in late January, the IMF has released its latest report on the Australian economy. This is a substantial document, including updated forecasts for key economic indicators.
At the macro level, the IMF does warn that Australia’s economic growth is expected to fall to 1.4% in 2024, with “…households with mortgages bear the brunt of higher interest rates, amidst lower real wages and depleting savings.” The recent changes to the stage three tax cuts and their emphasis on mortgage holders and ‘middle Australia’, are in part explained by this emphasis on where the economy-lifting burden mainly lies right now.
In addition to standardised data for all countries, the country consultations are an opportunity for the independent IMF economists to consider local issues of importance.
This latest IMF report is no different with specific research undertaken on the impact of migration.
Within Australia migration surges have historically been associated with higher growth and favourable labour market outcomes, with negligible price pressures except in the housing market.
The relationship between migration and inflation, as observed in both the headline and core consumer price indices suggests that higher net migration is not typically associated with price pressures. Statistically, the association appears weak, with correlation around zero, measured by the slope of the flat line in the scatter plot.
As John Kehoe wrote in the Australian Financial Review, there is much upside for the economy from migration. He wrote: “…the IMF found migration boosted labour productivity, with rises of almost 1 per cent five years after a large migration shock.”
The drivers are that migrants and overseas students are generally higher-educated than the domestic workforce and routinely have higher levels of labour participation. In short, migrants outperform the mean when it comes to their economic contributions.
House prices are to a reasonable extent related to migration, with the data suggesting that after migration surges, there is routinely a steady rise in house prices. This analysis was based on house price indexes for the periods following larger levels of migration.
The IMF report comments that:
“This trend can be interpreted in the context of a lagged migration effect on housing demand in the face of relatively inelastic housing supply. The housing price index remains stable between significant migration waves but rises slowly approximately five years before the next migration peak and accelerates further five years after the peak.”
However, rather than cutting migration to improve housing affordability, the IMF suggested a better policy was for state and local governments to improve planning and land use rules to expand supply. We observe they are not alone in pursuing that policy objective!
We cannot help but consider that this latest IMF report helps put paid to a trope we hear all-too-often in Australia: that migration is bad for the economy. The boldness of independent economic analysis by global outfits like the IMF is a welcome contribution.
