The link between immigration and recessionsOct 31, 2022
If Australia experiences a major economic slowdown in 2023-24 and a weaker labour market, what would happen to migration and recently arrived migrants?
The World Bank President says “the war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid.” The International Monetary Fund’s (IMF) baseline forecast is for growth to slow from 6.1 percent in 2021 to 3.2 percent in 2022, 0.4 percentage point lower than in the April 2022 World Economic Outlook. Its outlook for 2023 is for 2.9 percent global growth but it says the risks are ‘decidedly on the downside’.
Australia’s Treasurer considers we may avoid recession. Nevertheless, in the October 2022 Budget, he forecasts real economic growth slowing to 3.25 percent in 2022-23 and 1.5 percent in 2023-24; employment growth slowing markedly to 1.75 percent in 2022-23 and an extraordinarily low 0.75 percent in 2023-24; and unemployment rising to 3.75 percent in 2022-23 and 4.5 percent in 2023-24.
Over this period, Treasury forecasts net migration at 235,000 per annum. Compared to the March 2022 Budget, Treasury has increased its net migration assumption for 2022-23 by 55,000 and for 2023-24 by 22,000. But is that plausible given the sharp economic and employment slowdown being forecast over the same period?
A potted history of recessions and immigration
The history of recessions and economic downturns in Australia shows they are quickly followed by a sharp fall in net migration (see Chart 1). Essentially, more Australian citizens, permanent and temporary residents leave while fewer new migrants and temporary entrants arrive.
Often Australian Governments have cut the migration program (ie permanent visas granted) in response to recession to avoid a situation where large numbers of migrants are unemployed while ineligible for social support. At 198,000, the current migration program is the largest in our history.
Source: ABS Population
In the weaker economy leading up to the 1983 recession, with the unemployment rate rising from 5.4 percent in June 1981 to 10.3 percent in September 1983, net migration fell from a quarterly average of well over 30,000 in 1981 to 10,900 in the June quarter of 1983.
First Malcolm Fraser and then Bob Hawke cut the migration program. By 1984-85, the migration program had been reduced to 54,500 with a skill stream of 10,100. The Humanitarian Program was cut to less than 12,000 in 1985-86.
As the economy recovered and unemployment fell to less than 6 percent in December 1989, net migration again climbed to average over 30,000 per quarter in 1989. The migration program was increased to 124,700 in 1988-89 although the Humanitarian Program remained less than 12,000.
After the recession of 1990-91, with unemployment rising to 11.2 percent in December 1992, net migration again fell reaching a low of negative 6,300 in the June quarter of 1993. Hawke and then Keating reduced the migration program to 62,800 in 1993-94 although the humanitarian program was increased to 14,858.
As unemployment fell only marginally during the rest of the 1990s, net migration also recovered only slowly. This was partly due to the Howard Government initially maintaining the migration program at relatively low levels. Net migration eventually averaged around 30,000 per quarter in 1998 and 1999 although Howard would not start to increase the migration program until 2000-01.
But as unemployment steadily fell to below 5 percent by June 2005, net migration again increased, frequently to above 50,000 per quarter and peaking at 93,500 in the March quarter of 2008. The migration program was also increased to 158,630 in 2007-08 and a humanitarian program of over 13,000.
Net migration fell after the Global Financial Crisis but not nearly as far as after the 1990-91 or 1983 recessions. The Rudd and Gillard Government also didn’t reduce the migration program as much as their predecessors and began increasing the program more quickly once it was clear Australia would not fall into recession and the unemployment rate had peaked at less than 6 percent. Compared to other nations, the stimulatory measures used by the Rudd/Gillard Governments were remarkably successful.
Unemployment would again rise to above 6 percent in 2014-15 as the new Abbott Government implemented its austerity measures. As a consequence, net migration fell to 33,300 in the June quarter of 2015 even though the Abbott Government maintained the annual migration program at 190,000.
Net migration would rise to average over 50,000 per quarter for the next few years as unemployment fell to around 5 percent in December 2019.
The Covid-19 pandemic would have driven down net migration even if international borders had not been closed. With borders closed and unemployment rising to 7.4 percent in June 2020, net migration moved steadily into negative territory from June 2020 to September 2021.
The rapid recovery in net migration in the December 2022 (28,700) and March 2023 quarters (96,100 – new record for any quarter of net migration), driven largely by pent up demand from students, was accompanied by very low levels of unemployment reaching well below 4 percent. High levels of net migration are likely to continue for the rest of 2022 although there has also been a very high level of Australian citizen departures.
The strong correlation between the unemployment rate and net migration is highlighted in Chart 2.
Immigration and Recessions (2)
Source: ABS Population and Labour Force
Outlook for 2023 and 2024
For 2022-23, the Albanese Government has increased the migration program to 198,000 and a humanitarian program of 13,750 plus the special Afghan intake of 16,500 over four years.
There will be a surge of skilled migrant, new student and humanitarian arrivals in the March quarter of 2023, possibly to an all-time record. While this will create issues in terms of housing supply, issues that are already creating difficulties, the labour market should still be strong enough to absorb the surge.
If the labour market starts to weaken from the second half of 2023, as suggested in the October 2022 Budget, there will be difficulties for students, skilled migrants and the growing cohort of unsuccessful asylum seekers in particular.
The Government has announced students who entered Australia relying on unlimited work rights will again be limited to working 40 hours per fortnight from 1 July 2023. This is a sensible decision after former Immigration Minister Hawke trashed the reputation of Australia’s international education industry by allowing unlimited work rights. However, without effective transitional arrangements, many will be forced to work additional hours unlawfully – especially difficult in a weak labour market. Or they may be forced to rely on charity. Few will be able to afford to depart.
In a weaker labour market new migrants may find it more difficult to get a job using their skills. They too will be forced to accept any job that is available as they will have no access to social support for four years after arrival or when they receive an onshore visa.
If unemployment rises significantly, the Government may be forced into winding back the migration program as has been the case in the past when unemployment rises. Certainly net migration would fall below Treasury’s long-term assumption of 235,000 per annum (ie average of 58,750 per quarter)