Canada stuck in ‘population trap,’ needs to reduce immigration, bank economists say

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Canada is caught in a “population trap” and needs to rein in immigration significantly to escape it, according to a Monday report from National Bank of Canada economists, part of an emerging consensus that explosive growth is exacerbating some of the country’s economic troubles.

In the report, economists Stéfane Marion and Alexandra Ducharme say “staggering” population growth is stretching the country’s capacity to absorb new arrivals. They add that the main example of this strain is in the housing market, where construction has lagged behind demand from newcomers.

The National Bank economists argue that annual population growth should not exceed 300,000 to 500,000.

That would be a dramatic reduction from current levels. Over the 12 months to Oct. 1, Canada’s population rose by 1.25 million, or 3.2 per cent, the quickest pace of growth since the late 1950s. Almost the entirety of the population increase was driven by international migration, and most of that was from temporary residents, such as students and workers.

“Canada is caught in a population trap that has historically been the preserve of emerging economies,” the report says. “We currently lack the infrastructure and capital stock in this country to adequately absorb current population growth and improve our standard of living.”

The federal government’s expansionary immigration policies have increasingly come under fire. While Ottawa sets targets for the annual intake of permanent residents – the figure for this year is 485,000 – there are effectively no limits on the arrivals of temporary residents. Ottawa has argued that higher immigration is needed to address labour shortages, and to slow the aging of Canada’s population.

At an Economic Club of Canada event in Toronto last week, chief economists at Canada’s major banks were roundly critical of how the government is managing the immigration file.

“I’m a bit surprised that the government is moving fairly slowly on this,” Avery Shenfeld, the chief economist at CIBC Capital Markets, told the audience at the event. “I think there’s some urgency to bring these numbers of students and temporary workers into better balance with the arithmetic of our home-building strategy. … The numbers just don’t add up.”

The federal government has said it could start to limit the number of temporary residents this year, perhaps by setting a cap on visa approvals. As of Oct. 1, there were roughly 2.5 million temporary residents in Canada, an increase of more than 310,000 in just three months, according to figures from Statistics Canada.

But it appears that Ottawa did not heed warnings about the potential impact of its immigration policies. The Canadian Press reported last week that federal public servants told the government in 2022 that rapid increases in population could put pressure on access to health care and affordable housing.

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Surveys show that public support for immigration is fading, as Canadians link home affordability concerns to the influx of newcomers. Statscan’s inflation report shows that rents are growing at historically strong rates, while housing prices remain elevated despite a lull in activity in the home resale market driven by higher interest rates.

The national benchmark home price was about $710,000 in December, effectively unchanged from a year earlier, according to figures the Canadian Real Estate Association released on Monday.

In their report, the National Bank economists say a population trap is a situation in which living standards are unable to improve, because the population is growing so quickly that all savings are needed to maintain the capital-to-labour ratio. Capital includes a variety of things – such as property, equipment and software – that are used for the production of goods and services.

In Canada, the capital stock per worker lags well behind that of the United States. Moribund levels of business investment and weak productivity growth are perennial themes of debate in the Canadian economy, predating the recent surge of newcomers to the country.

Even so, many commentators say the issue has reached a crisis point. Real gross domestic product per capita – a popular measure of living standards – is no higher today than it was in 2017, pointing to years of economic stasis.

Bank of Nova Scotia chief economist Jean-François Perrault said last week that policy makers had perhaps made it “too easy” to hire foreign workers. “We’re making it cheaper to bring people in, rather than investing,” he told the Economic Club of Canada event.

Citing a labour shortage, the federal government has taken several steps over the past two years to increase employers’ access to foreign workers. For example, it temporarily scrapped a limit on work hours for international students who are employed off-campus. It also expanded the Temporary Foreign Worker Program, allowing companies to hire more workers from abroad at low wages.

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The labour market has softened over the past year as higher interest rates have weighed on consumer spending and businesses’ hiring plans. The total number of job vacancies has fallen 37 per cent from a peak in 2022, while the unemployment rate has risen to 5.8 per cent, from a record low of 4.9 per cent.

At the event last week, Mr. Marion of National Bank said the Toronto area’s population is growing so much every month that inflation for rental housing units can’t be contained.

The federal government has “lost control on immigration policy,” he added.