Interest rates

How Australia’s open borders are driving interest rates down and unemployment soaring

Fortress Australia is finally reopening – but the financial impact may not be good news for everyday Australians.

After two years of sealed closure, the Morrison government announced yesterday that Australia’s international border will reopen to double-vaccinated tourists from February 21.

This follows the recent lifting of border restrictions for skilled migrants, international students and working holidaymakers, which has seen more than 56,000 international students arrive since late November, alongside the approval of 28,000 holiday-visas. job.

The reopening of international borders will help the Morrison government achieve its plan to import at least 200,000 migrant workers into Australia by July.

It will also provide much-needed demand for Australian tourism operators, who are currently suffering as Australians can travel overseas without reciprocal travel rights for tourists wishing to travel Down Under.

Companies to win, workers to lose

At the aggregate level, having more people in the economy spending and consuming is good for economic growth.

Companies will benefit from having more consumers to sell to in addition to having a larger pool of workers to choose from: a win-win from their point of view.

The impact on ordinary Australians of restarting immigration is less positive.

The main reason Australia’s unemployment rate has plunged to its lowest level in nearly 14 years of 4.2% is that the country has gone from importing more than 180,000 workers each year via the pre-Covid immigration to the loss of tens of thousands of migrant workers.

Despite massive stimulus injected into the economy to ease lockdowns, the rate of job creation across Australia is lagging behind pre-Covid levels.

Still, resident unemployment and underemployment rates plunged to their lowest level since 2008, while the employment-to-population ratio hit its highest level on record.

The reason Australia’s labor market has become so tight, despite lackluster job growth, is that labor supply has gone from strong growth to stagnation during the pandemic, thanks to reducing the number of foreign workers.

If the pre-Covid level of immigration had continued during the pandemic, there would be around 460,000 more workers in the Australian economy. In turn, Australia’s unemployment rate would be much higher than it is now.

So it stands to reason that a return to pre-Covid immigration levels will again increase labor supply, leading to higher unemployment.

Higher immigration also means lower interest rates

Reserve Bank Governor Phil Lowe has repeatedly stated that wage growth must exceed 3% (from 2.2% currently) before triggering lasting inflationary pressures. Lowe also said the RBA believes the unemployment rate must fall below 4% to achieve stronger wage growth, and that it will not rise. interest rate until actual wage growth above 3 per cent is observed.

Thus, the RBA’s monetary policy is now inextricably linked to the country’s immigration policy.

If immigration picks up quickly and the Morrison government reaches its target of 200,000 migrant workers by July, labor market pressures will ease, the unemployment rate will rise and wage growth will slow (all things being equal Moreover). In this scenario, there will be less pressure on the RBA to raise interest rates.

This is effectively the scenario Australia has faced over the past decade when annual immigration has been strong, unemployment has remained high and wage growth has stagnated.

On the other hand, if immigration does not rebound as much as expected, Australia will face a tighter labor market, lower unemployment, higher wage growth and lower interest rates. higher.

There are also wider distributional impacts to consider.

The main beneficiaries of high immigration are those who have already accumulated assets and capital, namely the wealthy and entrenched businesses. Think big business, the real estate industry, and the education and migration industry.

On the other hand, for Australians, an open border allowing for high immigration will turn economic recovery into the same losing equation they faced during the last economic cycle. They will experience lower wage growth, house price inflation and overloaded public facilities.

Leith van Onselen is Chief Economist at MB Fund and MB Super. Leith previously worked at Australian Treasury, Victorian Treasury and Goldman Sachs.