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Immigration boom helps boost growth in rich countries, says OECD

By News Desk
May 03, 2024
Clare Lombardelli, the OECD’s chief economist. — Bloomberg
Clare Lombardelli, the OECD’s chief economist. — Bloomberg

LONDON: High flows of immigration into rich countries are helping to strengthen jobs markets and bolster growth, the OECD said, as it lifted its outlook for the global economy.

In its latest economic outlook, the Paris-based organisation said “exceptionally large” migration inflows into OECD countries, including the US, UK, Canada, Spain and Australia, last year had loosened tight labour markets and boosted gross domestic product.

It estimates GDP will grow by 3.1 per cent globally this year, up from a previous forecast for expansion of 2.9 per cent growth. Growth is projected at 1.7 per cent among the OECD member countries. The brightening outlook reflects faster falls in inflation than expected, improved business confidence and a recovery in household incomes.

However, there is a clear transatlantic divergence in fortunes. The OECD upgraded its forecast for US growth to 2.6 per cent for 2024, while a weaker outlook for Germany helped keep its forecast for eurozone growth unchanged at just 0.7 per cent.

Clare Lombardelli, the OECD’s chief economist, said the US economy was looking “remarkably strong”, with increasing evidence of it pulling away from European economies. The more subdued demand outlook in the eurozone could give the European Central Bank scope to cut interest rates sooner than the US Federal Reserve, she said.

Strong labour force numbers were part of the growth picture in the US and other economies, she said, adding that “extraordinary” rates of migration had “definitely” played a role in supporting growth.

The OECD said in October that humanitarian crises and labour shortages had driven migration to an all-time high, with 6.1mn permanent migrants moving to its 38 member countries in 2022 and cross-border movement forecast to rise even further in 2023.

“There is a positive role for migration in economies, it clearly helps with productivity, transfer of knowledge and ideas, it helps with labour mobility. That is all incredibly welcome, and in the longer term it will be part of how we cope with the demographic challenge,” Lombardelli said.

However, the OECD noted that per capita growth in GDP — a better measure of living standards — had been much weaker in 2023 than overall GDP growth and had for some countries been negative.

Lombardelli also said it was unclear how migration was affecting the pace of wage growth — a crucial concern for central banks worried that pay pressures are fuelling persistent inflation.

Some economists believe the surge in US immigration is one reason why the growth in jobs has been so much stronger than expected in recent months. The US Congressional Budget Office said in March that net immigration totalled 3.3mn last year — much higher than the Census Bureau estimates that underpin official data on the size of the labour force.

Economists say that if the higher estimates of immigration are correct, recent rapid employment gains would not be such a worry for the Fed as they would reflect an expanding workforce.

This would make it easier for employers to fill vacancies, where they might otherwise have had to raise pay sharply to hire from an existing, limited pool of workers.Jay Powell, governor of the Fed, said in an address at Stanford University last month “a strong pace of immigration” that boosted labour supply was one reason why US GDP and employment had grown strongly in 2023, “even as inflation fell substantially”.

“The change in labour supply is dramatic,” wrote economists at Morgan Stanley, who say it “allows for a larger economy without adding inflationary pressures”. They warned, however, that unemployment could rise in the near term while wage growth slows.

Record levels of immigration to the UK — while politically inflammatory — have been accompanied by an easing of labour shortages, with vacancy rates falling sharply in sectors such as social care and hospitality.

However, some economists are more sceptical about the scale of any effect.“It is fair to say that immigration has probably played at least a modest supporting role in dampening wage pressures,” said Goldman Sachs chief US economist David Mericle. “But I don’t think it was the main factor in bringing down inflation even within the labour market — I would be inclined to say the re-entry of people who left during the pandemic was probably as big or bigger.”