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

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.

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

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You cannot grow for ever on a finite planet.

> The problem is made worse by high government debt levels and fiscal deficits in some countries (see the two charts below).

So in an already vastly overpopulated world you want us to look to more population to solve the shortfall of the governments that have spent the tax (Social Security) that people have been paying to the governments to cover their old age. This is called a Pyramid scheme... the last ones in get nothing...

Basically; governments have known this is coming for many many years but robbed the piggy bank to give people what they wanted; not what they needed.

Add on top of this the fact that people seem "happy" to have their house prices going up... which ultimately leads to both parents having to work JUST to pay the inflated mortgages to keep the bankers rich.

The Parents are exhausted; the kids are plain awful and running out of control and the best teachers are giving up.

What a lovely world we are creating.

Within 10 years have the Maximum mortgage allowed to be 3xMain earners salary...
This will allow a parent; to parent.
House prices will adjust (as you simply cannot get yourself in too much debt).
Immigrants have to build new houses; residents (over 5 years) can buy new/used housing.

Educate the people as what a government that always gives them what they want really costs them; or do more cross party policies if a certain policy is for the greater good so that governments can take the hard decisions and not take the blame.

yet such a ponzi scheme is legal....

Boomers kicking the can onto my generation. Thanks

If you don't stand for something; you will fall for anything.

www.youtube.com/watch?v=X0gtzHJphVg

Some boomers.....

your ongoing compulsive obsession with Boomers knows no bounds

Rodney Dickens is identifying the age cohort 75+ years and older
Which just so happens to be the generation before the Baby Boomer generation
Are you innumerate? or
have you been waiting for the opportunity to get that spray away?

Analysis of your comment implies Boomers are responsible for the one generation older than Boomers, yet you dont want responsbility for any generation older than yourself

Either that or you are trolling - looking for a response
remarkably you got 4 thumbs-up
shows how unthinking some people are
oops .. correction ... now you have 5 thumbs-ups

um, I think generation Jones is the end (sub-) of the BBs, 1960 to 1965 or something and not 75+ which are the "Mature/Silents" generation or maybe "Greatest generation" depending......

So in terms of analysis, I'll give you an F for not even googling....

http://www.esds1.pt/site/images/stories/isacosta/secondary_pages/10%C2%B...

Well thank you, I learnt something today

Thanks for the rant, I don't think I've mentioned boomers much before, if ever.

The solution touted of pouring in immigrants to deal with the *upcoming* boomers retirement places a lot of stress on younger generations in with housing, infrastructure and salaries. Then the immigrants get also old, and so the can is kicked... Its not an unjust comment.

The Australian Productivity Commision looked at this and concluded that immigration isn't a solution as the migrants themselves age. Of course we are sailing into a golden future of large economic gains due to agglomeration and liberalism- biology meets economic theory + progressivism = splat!

Michael Reddel thinks we would have been better off if we had kept our population low instead of adding more and more people post WW 2. Better off means more savings and more space (raise chooks and veges in the cities as we used to in the bad old days before the real estate industry started running the country).

We are importing the problem
http://www.interest.co.nz/property/77706/migration-gain-hits-all-time-60...

Examine Dickens graph above of net migration by age groups
in three age groups
50-59
60-69
70+
We are still bringing them in
there is about 10,000 in total in there on a 12 months rolling average

You seem to forget you have to be here for 10 years before you get NZ Super.

I came in at 49, paid lots of NZ taxes and employed lots on tradesman and spent loads and have bought lots of stuff here over the years. I am now 65 and get the Super and my wife joins me at 65 next year, however most of the money comes from the country of source as is required of all immigrants.

Out son came with us, went to Uni here and has just finished paying his loan off. He is married to another Brit and between them they pay huge taxes, way more than three times our Super (that mostly comes from the UK). They are expecting there first baby any day so we have another generation of taxpayers on the way. We also have private Health insurance.

When we pop our clogs all the money we brought in will stay here with our son , still working and paying taxes for your Super. Please tell me what negative issues are there in us being here? Also what you wingers don't realize is it is us that man the volunteer groups in NZ for nothing more than to help people like you.

YES BUT ..........In theory immigration will ease the tax burden on the elderly, BUT not while those migrants are bringing in their ageing parents under the family reunion migration rules .

Quite simply that crooked old goat , Winston Peters , is correct when he says aging parents of migrants are likely to burden and unintentionally plunder our social welfare and health systems to the point of collapse

easing the burden is only true if it can be established that the incoming people do become taxpayers and do pay tax - and not just GST

If we need more population, how about not burdening the very best of our own young with student debt and impossibly high house prices?

Also teach them at school about having proper relationships with the opposite sex, not letting the majority accept drunken encounters as the norm.

Societal changes are needed to encourage reproduction amongst the sectors of population who are most capable of bringing up good New Zealanders!

Importing the riff raff from around the globe to work at minimum wage in New Zealand is no solution to an ageing population.

Current NZers could make any necessary expansion in population by good people having slightly larger families (4 kids instead of 2 or 3).

At some stage the world, including New Zealand, needs to adapt to a steady or even declining population, and manage for that outcome. Japan is continually used as a supposed demographic disaster case, where from my visits there, as well as the data, the place looks very comfortable, and would be frankly a better place still with 25 million less people. 3.5% unemployment is world leading. They have coped remarkably well with tsunami related energy shocks. Automation, at which they are world leaders, is sucking up traditional manual labour jobs, so coping with an ageing population is not that scary for them. Yes, some small rural towns are dying, but that will be true anywhere. And getting old with dementia and age related illnesses can suck, but that is also true regardless.
The Reserve Bank arguments in relation to immigration are mostly a red herring. I agree the Reserve Bank act should have been changed when the chance offered itself 2-3 years ago. We are though better off with a lower exchange rate when the current account is materially negative, so house prices being high are the lesser of two evils, and appear to be somewhat self correcting now.

An extremely relevant criticism of an RBNZ governor acting out a remit inconsistent with the welfare of the nation, underpinned by a self serving, but nonetheless passed it's use by date redefinition of inflation, namely CPI.

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.

Is it just the governor that has been captured by interested parties, or the whole RBNZ board?

The answers you seek are right here

Check out the date Connor English was "appointed" (foisted) onto the RBNZ board

Provides an immediate emissary+conduit plus deniability of any pressure on the governor

Or was it simply nepotism

And how well does this possible benefit compare to the cost of building the extra required infrastructure, houses, hospitals, schools, etc....etc? I suspect that it will look trivial compared to those costs.

Why not consider the benefits of building that infrastructure? The demand for labour, materials, spending on ancillary services? And the increased spending in the broader economy?

In terms of considering the benefits there are a lot of Qs around if it is of real benefit, see a) , b) and c)

besides that,

Short term,

a) Who pays for this expansion? invariably its via rates increases and debt which is a risk to the existing ratepayers (if not tax payes generally) and seems to offer questionable gains.

b) In effect you stimulate the economy today via debt which will suppress the economy in the future to re-pay that debt plus interest, ergo the benefits must outweigh that future cost to make sense.

Medium term, c) we have grown this far due to fossil fuels and specifically oil which will become scarce as it depletes and runs out by about 2050.

Long term, d) You cannot grow forever on a finite planet.

Would you run a business that way? Employ lots of staff that do not contribute to the what it sells. Build lots of offices, provide company cars, superannuation and health benefits etc. Just build empires by generating a lot of employment and activity within the company without contributing to it's sales or production. These are worthless overheads. NZ is a bit like a company and our sales are our exports. Emigrants largely add nothing to exports.

I would beg to differ Chris-M. I'm a true blue Kiwi and have seen that even short-term migrants contribute significantly to our export industries. Do you think that the mussels and oysters at Talley's would shell themselves, apples, pears, and kiwifruit pick themselves from the tree, and wine grapes fall from the vine by themselves? The vast majority of labour in those industries are done by migrants. Most Kiwis can't afford the insecurity and low pay of jobs in those industries. I know that myself. I've worked in all of those.

a) All economic activity is based on debt. You have money in your pocket and bank account, because someone else took a risk and borrowed to invest in some venture of one form or another. Besides, public debt is the safest form of debt. Why do you think bank are willing to hold trillions in public debt despite receiving zero returns?

b) No it doesn't, debt is paid by other people being also willing to borrow and invest and allow capital to circulate through the economy.

Surely its better to invest in public infrastructure and housing than on spending on frivolous private consumption, which only end up in the landfill after a short period of use.

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