Quick Take: New Canadian Immigration Policy

When it comes to Canada’s immigration strategy, the pendulum appears to be swinging all the way to the other side. The federal government announced Thursday its intention to slow the number of permanent resident admissions from about 470K in 2023 and 485K this year to 395K in 2025 (graph). As a result, when combined with the previously announced goal of reducing the number of temporary residents in the country, it’s likely that population growth almost grinds to a halt next year. That would represent an incredible swing from the historically high 3%-plus population increase seen in 2023.

Corporate Canada had already expressed concerns about the economic impacts of the temporary resident reduction. The revision in permanent resident targets will no doubt have executives even more worried about revenue growth and labour supply as they plan for 2025. While we believe the implications for GDP growth might be muted by some offsetting factors, and so the revenue hit might not be so severe, we wouldn’t be surprised to hear about labour shortages later on in 2025.

The goal of this plan is to allow time for the supply of housing and infrastructure to catch up with demand. But with a rapidly aging demographic, that near-term objective will come at the expense of solving Canada’s longer-term labour force constraints. In past research, we’ve shown a sharp increase in the dependency ratio even under previous immigration targets.

The near-term economic implications aren’t as acute as they might seem though. While we’re marking down our population growth forecast for 2025 by 0.2 percentage points, the revision to GDP growth needn’t be as stark. Fewer job searchers could leave wage growth settling at a higher level than it would have been under our previous forecast. That would seemingly support the recovery in consumption per capita that the Bank of Canada is now seeking. Moreover, if the slower pace of population growth helps improve shelter affordability, households might have more cash available to spend in other areas of the economy, particularly those that have been struggling lately.

The economic impacts from Thursday’s announcements don’t immediately change our outlook for the Bank of Canada. A reduction in permanent resident admissions will put roughly equal downward pressure on both the demand and supply sides of the economy. Therefore, Thursday’s announcement does little to change our outlook for the output gap in Canada and, therefore, the near-term trajectory of rates. That said, given that potential GDP is an important input into neutral rate estimates, the latest changes give us even more confidence in our dovish outlook. We continue to believe that the Bank of Canada will need to take its policy rate down to 2.25% in 2025.

As recently as Wednesday, the Bank of Canada was doubting the government’s ability to reduce non-permanent residents as quickly as planned. In contrast to the changes to permanent resident admissions, the planned decrease in temporary residents, particularly students, will lower demand more than supply, since these residents weren’t adding much to the productive capacity of the economy. So, as we said Wednesday, there is a risk that the central bank downgrades its view of the economy if policymakers begin to more fully incorporate the government’s plans for non-permanent residents. But as of right now, that’s still only a risk. And it’s unlikely that the Bank of Canada would make any major changes to its outlook before its January Monetary Policy Report.