As Canada looks to reduce immigration numbers in the coming years, Canadians may wonder what those population changes might mean for the risks of a recession.
In recent years, experts and federal officials have pointed to high population growth, due largely to immigration, as a factor that has helped Canada avoid an economic recession.
“We are of the view that the Canadian economy would likely have experienced a recession in 2023 if not for the decades-long population growth we saw in 2023 (and) 2024,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
In January, the financial institution along with other economists had suggested that a short, shallow recession was possible in the first half of the year, although as time went by that did not happen.
Bartlett said Desjardins anticipates real GDP (gross domestic product) growth of about 1.5 percent annualized in the third quarter of 2024, and about two percent in the fourth. The Bank of Canada itself forecasts GDP growth of 1.5 per cent in 2024 and 2.2 per cent in 2025.
However, on Thursday the federal government announced it would reduce the number of new permanent residents by 21 percent for next year, with further drops in the following two years.
Bartlett warns that there remains uncertainty about what comes next for Canada’s economy.
“What we see is that there really is a trade-off between the population growth that we expect to see and the real GDP growth per capita,” Bartlett said.
“We see more economic activity being generated in Canada, we see increased productivity in Canada over the next two years that could help us avoid a recession even as population growth slows considerably.”
Another factor is the Bank of Canada’s recent and upcoming cuts to its key interest rate.
Earlier this week, the bank made an excessive cut that reduced the rate from 50 basis points, now focusing on encouraging growth to make it easier for Canadians and businesses to spend and boost the economy.
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Bank of Canada Governor Tiff Macklem, reacting to the immigration cuts, said Friday that the move could have a bigger impact on its growth forecast than on the trajectory of inflation.
However, he added that there was a lot of uncertainty about how quickly the cuts would be implemented.
“If population growth declines faster than we assumed, overall GDP growth will be lower than we assumed,” Macklem said.
BMO economist Robert Kavcic said in a report Thursday that immigration cuts could have “wide-ranging implications,” including reducing stress on the economy and infrastructure such as housing and services.
But in an interview with Global News on Friday, he said the cuts would also give the Bank of Canada a little more room to maneuver.
“If anything, it will give the Bank of Canada more room to continue cutting rates however it wants and ultimately, on a per capita basis, put us in a better, more sustainable position in the long term,” Kavcic said.
He added that the cuts could also have an impact in the immediate future on consumer spending and construction activity, but from a “big picture” perspective, they will not cause a recession.
Macklem said in his comments Friday that if household spending recovers more quickly due to the central bank’s continued reduction in borrowing costs, economic growth could be higher.
Philip Oreopoulos, distinguished professor of economics at the University of Toronto, told Global News that the Bank’s decisions involve more than just population growth.
“The bank is trying to attract more money flow in a way that can encourage more economic activity,” Oreopoulos said. “I still think that kind of independent action is a stronger measure to fight the recession than the potential negative impact of reducing the number of immigrants.”
Bartlett added that in the future, the Bank of Canada may need to adjust its considerations of population growth when making its interest rate decisions.
“The Bank of Canada… is going to have to significantly reduce the pace of population growth which is assumed to have impacts on overall real GDP growth in the bank’s forecast and could have impacts on inflation as well as the rate profile of interest that economists expect,” he stated.
— with Reuters files
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