Canada immigration cuts could drag down economic growth

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Canada’s population growth is about to go from warp speed to stall.

After leading the world in population gains these past few years, Canada will admit about 20 per cent fewer permanent residents in 2025, the federal government announced last week. The numbers will continue to drop by about 4 per cent a year through 2027.

Ottawa also set its first target for temporary immigrants, cutting the numbers by about 446,000 in 2025 and 2026.

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If it meets these goals, Canada’s population will actually shrink for the first time in data going back to the early 1950s, reports Bloomberg — by 0.2 per cent in 2025 and 2026, before returning to growth in 2027.

“To say that immigration has become one of the most significant economic issues in Canada would be an understatement; in fact, it might be right at the top given the large and widespread impacts,” said Robert Kavcic, senior economist at BMO Capital Markets.

Opinions differ when it comes to those impacts.

Stephen Brown, from Capital Economics, said the new targets meant their economists had to tear up their forecasts for GDP growth of 2 per cent in 2024 and 3 per cent in 2025.

With a stagnating labour force, GDP growth likely will be no more than 1 per cent for the next two years and even that would take a jump in productivity growth, he said.

The biggest risk, he said, is to residential investment, with the surge in housing starts of purpose-built rental buildings “likely to go into reverse,” as demand drops.

Others are more optimistic. Royce Mendes, head of macro strategy, and economist Randall Bartlett at Desjardins Group, said the impact on the economy might not be as severe as it would seem. Wage growth could settle at a higher level with fewer workers in the economy and housing affordability should improve, leaving households with more money to spend elsewhere.

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BMO’s Kavcic said one could argue that the surge in temporary residents over the past few years has diverted resources to housing and allowed companies to use low-cost labour rather than improve productivity.

“While this move will dampen demand … we need to dispel the narrative that slower population growth will be bad for the economy,” he said.

Bank of Canada governor Tiff Macklem said the central bank would review its growth projections in light of the announcement. Its most recent forecast put population growth at 1.5 per cent and GDP growth at 2.1 per cent in 2025 and 2.3 per cent in 2026.

The new immigration targets give Desjardins even more confidence in its “dovish” prediction that the Bank of Canada will take rates down to 2.25 per cent in 2025.

But Capital Economics thinks the changes could push the bank to cut rates lower than it would have otherwise — “particularly if an imminent election brought the opposition Conservatives to power and they doubled down on these restrictions on immigration, something we would not rule out,” said Brown.

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One bit of news out of the International Monetary Fund’s annual meeting this past week you might have missed is that Liechtenstein became the 191st member of the IMF.

This tiny country, just 160 square kilometres nestled in the Alps between Austria and Switzerland, is among the smallest European states — but while its geography is small, its economy is mighty.

At US$197,000 a year, Liechtenstein has one of highest per capita incomes in Europe, second only to Monaco.

The country boasts a globally competitive manufacturing sector ranging from plant construction to dental instruments and invests a hefty 6 per cent of its GDP on research and development. Its financial sector accounts for 20 per cent of gross domestic product.

One distinctive feature of the economy is that the number of people employed in Liechtenstein exceeds its population. About 40,000 people live in the country, but 42,500 work there, with half of the workforce commuting daily from Switzerland and Austria. Its labour force participation of 76.1 per cent is higher than the European Union and the unemployment rate is less than 2 per cent.

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Oh, and Liechtenstein has just 1,500 civil servants, less than 4 per cent of the population and significantly lower than the EU average of about 17 per cent.

— Facts compiled by IMF economists Rodgers Chawani and Kazuko Shirono

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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