As Canada looks to cut immigration numbers in the next few years, Canadians may be wondering what those shifts to the population could mean for the risks of a recession.
Experts and federal officials over recent years have pointed to high population growth, due in large part to immigration, as a factor that has helped Canada avoid an economic downturn.
“We were of the view that the Canadian economy likely would have experienced a recession in 2023 had it not been for the decades-high population growth that we saw in 2023 (and) 2024,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
In January, the financial institution along with other economists had suggested a short and shallow recession was possible in the first half of the year, though as time went on that didn’t come to pass.
Bartlett said Desjardins is anticipating real GDP (gross domestic product) growth of about 1.5 per cent annualized in the third quarter of 2024, and about two per cent in the fourth. The Bank of Canada itself forecasts GDP growth of 1.5 per cent in 2024 and 2.2 per cent in 2025.
On Thursday, however, the federal government announced it would reduce the number of new permanent residents by 21 per cent by next year, with further drops the following two years.
Bartlett cautions there remains uncertainty in what comes next for Canada’s economy.
“What we see is that it really is a trade-off between population growth that we’re expecting to see and per capita, real GDP growth,” Bartlett said.
“We see more economic activity being generated in Canada, we see increased productivity in Canada over the next couple of years that could help us avoid a recession even as population growth slows considerably.”
Another factor is the Bank of Canada’s recent and expected future cuts to its key interest rate.
Earlier this week, the bank delivered an oversized cut bringing the rate down from 50 basis points, with its focus now on encouraging growth to make it easier for Canadians and businesses to spend and boost the economy.
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Bank of Canada Gov. Tiff Macklem, in reaction to the immigration cuts, said Friday the move could have a bigger impact on its growth forecast than on the trajectory of inflation.
However, he added there was a lot of uncertainty on how quickly the cuts would be implemented.
“If population growth comes down faster than we have assumed, headline GDP growth will be lower than we assumed,” Macklem said.
BMO economist Robert Kavcic said in a report on Thursday that the immigration cuts could have “wide ranging implications,” including taking stress off the economy and infrastructure like housing and services.
But in an interview with Global News on Friday, he said the cuts would also give a bit more leeway to the Bank of Canada.
“It’s going to allow the Bank of Canada, if anything, more room to continue cutting rates as they want to and ultimately, in per-capita terms, put us in a better, more sustainable footing for the longer term,” Kavcic said.
He added that the cuts could also have an impact in the immediate future on consumer spending and construction activity, but from a “big picture,” won’t cause a recession.
Macklem said in his comments Friday that if household spending recovers more quickly due to continued lowering of borrowing costs by the central bank, economic growth could be higher.
Philip Oreopoulos, a distinguished professor in economics at the University of Toronto, told Global News there’s more to the Bank’s decisions than just population growth.
“The bank is trying to attract more money flowing in a way that might encourage more economic activity,” Oreopoulos said. “I still think that that kind of action independently is a stronger move to fight the recession than the potential negative impact of reducing the number of immigrants.”
Bartlett added that going forward, the Bank of Canada may need to adjust its considerations of population growth when making its interest rate decisions.
“The Bank of Canada … is going to have to significantly scale back the pace of population growth that it’s assumed that’s going to have impacts for overall real GDP growth in the bank’s forecast and could have impacts for inflation as well as the interest rate profile that economists are expecting,” he said.
— with files from Reuters
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