(Bloomberg) -- Prime Minister Justin Trudeau’s government is taking its foot off the population pedal that’s been a key economic driver. But despite a significant cut to new arrivals, Canada will still see positive growth, according to the immigration minister.
An influx of newcomers helped accelerate Canada’s post-pandemic recovery, replenishing an aging workforce and lifting its population growth to among the world’s fastest. But the record surge soon worsened housing shortages and pushed up the unemployment rate.
The Canadian government on Thursday set targets to lower admissions across all key immigrant groups starting in 2025. The curb will result in a slight population contraction in the next two years, from 3% currently — the first decline in data going back about seven decades.
But Immigration Minister Marc Miller is confident the reduction won’t hurt the economy, at least in the short term. Projections from the Finance Department are all consistent with positive growth, Miller said in an interview with Bloomberg following the announcement.
“We do have an aging population and whatever you see in the next three years with the neutral population growth is counteracted by the quite large growth that we’ve seen in the last three years,” he said. “If it goes on too long, you have a concern, but we’re not in that situation, far from it.”
Economists were weighing the upsides and downsides of the announcement on Thursday. Many noted the measures should ease pressures on housing, the labor market and the social safety net, and potentially boost Canada’s lagging gross domestic product per capita.
“While this move will dampen demand, all else equal — think spending in retail, food and telecom services — we need to dispel the narrative that slower population growth will be bad for the economy,” Robert Kavcic, senior economist at Bank of Montreal, said in a report to investors.
The government’s announcement came just a day after the Bank of Canada cut issued fresh economic forecasts. It expected population growth to slow to 1.7% in 2025 and 2026, but for lower interest rates to jolt per-person spending on housing and consumer goods as well as business investment, allowing the economy to grow by more than 2% each year.
Miller’s estimate is for the population to contract by 0.2% in each of the next two years — likely necessitating revisions to the central bank’s outlook.
Stephen Brown of Capital Economics said the immigration targets mean his shop has to tear up its existing forecast for GDP growth to accelerate to 2% in 2024 and 3% in 2025.
“With the labor force now likely to stagnate in 2025 and 2026, potential GDP growth will be no more than 1% for the next two years, and even that would require a substantial pick-up in productivity growth from recent negative rates,” he said in a note.
The biggest risks are to residential investment, he said. “With rents already falling in many cities and the prospects for rent growth now even weaker, the recent surge in housing starts of purpose-built rental buildings is likely to go into reverse.”
For Trudeau’s government, the policy turnaround — after nearly a decade of continuously and ambitiously ramping up migrant intakes — is an acknowledgment that the system needed a reset. In Trudeau’s words, it was time to “pause our population growth and let our economy catch up.”
The new immigration targets would bring annual arrivals down to levels seen before the pandemic, which at the time was ambitious, according to Miller. “The correction that we are doing today is one that is important and significant, not cosmetic.”
Pressures on housing, rents, public services and the labor market from record population increases threatened a long-held belief that mass immigration is beneficial to the Canadian economy. A survey last week showed Canadians haven’t felt this strongly opposed to arrival levels in a quarter-century.
“It’s necessary given the legitimate scrutiny of the rapid volume increase over the last few years,” Miller said. “There’s no denying the volume has certainly led to questioning and led to some challenges in affordability or even some political dialogue that’s gotten a little instrumentalized.”
“It digs away at the consensus that we’ve made and fought quite hard for in Canada.”
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