Capping immigration could speed rate cuts but derail Canada's growth

Desjardins sees quicker rate relief ahead but flags economic growth risks from population caps

Capping immigration could speed rate cuts but derail Canada's growth

The Canadian government's plan to limit the number of temporary residents may lead to interest rate cuts, but could impact the economy negatively, Desjardins reported.

The plan, announced by immigration minister Marc Miller last week, aims to bring down the non-permanent resident (NPR) population from the current level of 6.2% to 5% over the next three years.

In a statement, Randall Bartlett, senior director of Canadian economics at Desjardins, said a decline “of this magnitude would be unprecedented” and that the government’s plan has “material implications” for the economy.

Bartlett added that reducing NPRs by around 500,000 to 2 million would require more temporary residents leaving than entering Canada, which has “forced us to revise our population growth forecast dramatically lower.”

 This, in turn, could make interest rate cuts by the Bank of Canada even more likely in June, according to Desjardins.

While this could boost real GDP per capita growth through higher productivity, the financial firm expects the overall impact would drag down aggregate real GDP expansion due to slower population increases.

Employment growth is projected to slow but remains positive. However, the unemployment rate is expected to rise, as NPRs tend to have lower unemployment rates.

"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," Bartlett explained.

The combination of higher unemployment and weaker GDP growth should relieve inflationary pressures, allowing the Bank of Canada to cut interest rates faster than previously forecast.

Read more: Will the Bank of Canada cut rates before the Fed?

The anticipated lower inflation resulting from reduced population growth could marginally boost real earnings growth. However, this may not be sufficient to offset the slowdown in consumption.

On the fiscal front, Desjardins predicts that immigration policy changes may lead to reduced government revenue, larger deficits, and increased federal debt. Although provinces may experience some relief in healthcare costs, demographic aging will likely strain public finances.

While providing some public service delivery and housing supply relief, Bartlett warned the immigration curbs carry noteworthy economic risks:

"If population growth is what largely kept Canada out of recession in 2023, that tailwind to growth is about to largely disappear," Bartlett said.

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