March 28, 2024
The Canadian government’s recently announced plans to soft-cap temporary resident numbers should pave the way for interest rate cuts to happen sooner and more frequently, but could have “adverse consequences” for the overall economy, according to Desjardins.
Under plans announced by Immigration Minister Marc Miller on March 21, the proportion of non-permanent residents (NPRs) would be reduced from the current level of 6.2 percent of the population, to five per cent over the next three years.
“A decline in net NPRs of this magnitude would be unprecedented,” Desjardins Senior Director of Canadian Economics Randall Bartlett wrote in a published note, saying the change had “material implications” for the economy.
While Bartlett describes the analysis as a “scenario” — with a more comprehensive evaluation due in Desjardins’ April economic outlook — he wrote that the changes make a Bank of Canada interest rate reduction even more likely in June. If the scenario holds, Bartlett said “our base case for more rate cuts than expected by the consensus of economists is even more likely to materialize.”
Decreasing the NPR population by half a million to around 2 million would require more NPRs to leave than enter Canada, Bartlett said, and that change “has forced us to revise our population growth forecast dramatically lower.”
Canada’s rapid population growth has been a focus of recent political and economic conversation, particularly its impact on housing. Miller’s announcement last week came two months after he reduced the number of international student visas by 35 per cent.
Effects on GDP, employment and beyond
As a consequence of last week’s announcement, Desjardins expects Canada’s perennially anemic real GDP per capita growth to be “stronger than previously projected” because of higher productivity growth. But, Bartlett wrote, the significantly lower projected population growth would have a larger effect on aggregate real GDP growth, causing it to drop.
Desjardins’ outlook on employment is mixed. The bank expects employment growth to be slower, but still positive. However, the unemployment rate should rise, Bartlett said, because NPRs are less likely to be unemployed than other groups. “So removing them from the labour force entirely means unemployed Canadians could make up a larger share of people either working or looking for work.”
With unemployment higher and real GDP growth slowing, that would put downward pressure on inflation, Bartlett wrote, opening the door for the Bank of Canada to cut its benchmark rate, likely at a faster pace than previously forecast.
Lower inflation should also “provide a modest tailwind to real earnings growth, helping Canadians to regain more of the ground lost during the pandemic.” This, Bartlett wrote, will be good news for individuals, but “won’t be enough to offset the drag on consumption coming from the slower pace of population growth.”
For the federal government, the changes would likely lead to lower revenue, Desjardins noted. This could mean larger deficits and more federal government debt, Bartlett wrote. At a provincial level, there could be some wins in the form of lower healthcare costs, Bartlett said, but “aging will be an inescapable drag on provincial finances and reducing the number of NPRs will only exacerbate pressures on public finances, absent a material boost in productivity.”
Though the immigration changes will offer some relief around housing and public service delivery, Bartlett wrote, the macroeconomic impacts could be considerable. “If population growth is what largely kept Canada out of recession in 2023, that tailwind to growth is about to largely disappear.”
