Canada: The Economy Still Isn’t Keeping Up with Skyrocketing Population Gains

Yet another quarter of decades-high population growth continues to complicate Canada’s monetary policy picture. As we’ve highlighted multiple times before (see here This link will open in a new window., for example), very strong population growth has short-run and long-run implications. As the Bank of Canada tries to rein in inflation, the headcount surge is boosting demand for goods and services and risks further inflaming price pressures. Yet, over time, it should also help to increase the supply of available workers, thereby reducing labour market tightness and mitigating the risk of wage-push inflation.

That said, these data don’t change our call that the Bank of Canada will hold interest rates steady in January and eventually cut by mid-2024. The Canadian economy is clearly weakening under the weight of sharply higher interest rates. Today’s easing in the Bank’s preferred core inflation numbers for November 2023 This link will open in a new window. reinforces that point. Ultimately, while strong population growth has been a tailwind for Canada’s economy, real GDP per capita has been falling for several quarters, which has not tended to happen outside recessions (graph 1).

Continued contributions from net non-permanent resident (NPR) admissions are particularly striking. NPRs include temporary foreign workers and international students, and made up almost 70% of population growth in the year to October 1, 2023. The contribution was particularly strong in the three large net oil-consuming provinces, but it seems to be increasing across Canada (graph 2). In the most recent quarter, almost 60% of NPRs were work permit holders.

NPR-based population gains present risks to economic growth. We’ve seen labour demand and foreign worker program usage decline when economic growth has slowed in the past. That suggests the slowdown we expect next year could drive much slower population gains that exacerbate economic weakness. Indeed, yesterday’s job vacancy data show that the labour market tightness built up during the pandemic is abating (graph 3). That said, Ottawa’s increased use of temporary migration as a path towards permanent residency limits the downside risk, as we highlighted recently.

In the end, though, today’s data raise even more questions about Canada’s longer-run economic prospects. Ontario continues to see near-record movement to other provinces partly in response to stretched housing affordability. Given Alberta’s significant advantage in this respect, the trend could very well persist. More broadly, the population numbers once again reinforce the need to boost the housing supply and bolster infrastructure spending. And of course, until Canada’s well documented long-run underperformance on productivity is addressed, we’re at risk of further declines in GDP per capita (and our standard of living). Tackling these problems is critical to ensuring Canada remains a welcoming and prosperous place in the years to come.