How lowering the number of non-permanent residents will impact Canada’s economy

April 05, 2024 | Nathan Janzen


How lowering the number of non-permanent residents will impact Canada’s economy

  • Federal government efforts to limit non-permanent resident arrivals will likely slow the pace of gross domestic product growth in 2025 and beyond.
  • However, per-capita GDP, the unemployment rate, broader inflation pressures, and interest rate expectations should not be significantly impacted.
  • Slower non-permanent resident arrivals result in an older Canadian population, lower labour force participation, and slower growth in the government revenue base.
  • The payoff from this policy shift is that it buys time for supply to catch up in sectors like housing where it takes substantial time for new construction to respond to increased demand, and where affordability levels have deteriorated dramatically in recent years.

Slowing non-permanent resident arrivals will make the Canadian population older and make the impact from the ongoing wave of baby boomer retirements somewhat steeper. But slower population growth could ease price pressures in some pockets of the economy where supply has been slow to adjust to increased demand, particularly for housing.

The federal government announced plans to aggressively cut back on the arrivals of non-permanent residents in Canada by implementing an annual target for arrivals similar to what has been done for permanent residents each year. The number of arrivals that will be allowed is yet to be determined but the starting goal announced by the federal immigration minister is to reduce the share of the temporary resident population to 5% of the Canadian population over the next three years. That amount is currently around 6.5% as of Q4 last year.

The total productive capacity of the economy will grow more slowly with slower population growth, but its impact on the kinds of metrics that matter from an individual household or worker perspective— such as per-capita GDP/incomes, the unemployment rate, broader inflation pressures, and interest rates—should remain little changed from previous expectations.

Clear shift in policy direction

Details of the Canadian government’s plans have not been announced other than some specific changes to limit international student permits and temporary workers specifically under the Temporary Foreign Worker Program. The actual target rates for non-permanent residents will be announced in the fall after consultation with other levels of government and will likely shift from the initial plans.

Most economic forecasts (including ours) already assumed non-permanent arrivals to Canada would slow sharply this year, driven organically by softening labour demand and earlier changes announced to cap student permits. However, the shift in approach from the federal government implies that the number of non-permanent residents in Canada would need to decline by about 20% over three years, representing about 500,000 fewer people. That would still leave the share of the non-permanent resident population at a relatively high level. The level was closer to 3% pre-pandemic. Still, the shift in policy means that the pace of growth will likely be slower than previously assumed while this adjustment takes place.

Slower GDP growth but per-capita output little changed

We have noted previously that when the population rises via immigration, it essentially floats all boats. It increases both the capacity of the economy to produce more goods and services (by increasing the supply of labour) and increases demand for those products because every added resident arriving from abroad is also a consumer. Conversely, slower population growth will both reduce demand for workers and supply of workers at the same time.

That will have an impact on total production and income earned in the economy. It will take time for the population of non-permanent residents to decline even after limits on new arrivals come into effect. But our own early assumption is that slower population growth could make the economy grow about 0.5% less than previously expected by the end of 2025. Per-person output—when you consider individual households—has declined for six straight quarters by our estimates and shouldn’t be significantly impacted. The unemployment rate should also be little changed, because both the supply and demand for workers slows at the same time.

Canadian productivity (output per hour worked) growth could be higher than otherwise would have been the case because Canada has a poor record historically of fully utilizing the skills of new arrivals from abroad.

Slower international arrivals will lead population to age more quickly

Immigration has long been seen as one way to help blunt the economic impact from the wave of people leaving the labour force as the relatively large baby boom generation continues to hit retirement age. Those retirements lower tax revenues for governments while demand for services like healthcare and social security accelerates, creating a large funding gap.

Those long-term demographic challenges aren’t going away. Labour shortages have been easing as high interest rates slow hiring demand, but they’ll be back again after the short-run economic cycle as the share of the population hitting retirement age continues to rise.

The impact of lowering the share of non-permanent residents on the broader mix of ages in the total population is likely to be limited. But the net impact will make the population older. Immigration helps slow population aging because new arrivals are substantially younger than the broader population. About 70% of new permanent residents are under the age of 35 versus about 40% of the Canadian population. The population of new temporary residents is even younger with typically more than 80% under the age of 35. Surging arrivals from abroad is one of the reasons that both the median and average age of the population declined for the first time in decades last year.

Older population means lower labour force participation

A younger population translates into higher labour force participation from the immigrant and temporary resident populations, and higher tax revenues for governments to help fund social programs. Slowing rates of immigration will tend to do the opposite.

The total labour force participation rate among non-permanent residents is higher than for the broader population (74.2% vs. 65.6% in 2021), and our calculations imply that gap remains wide. The non-permanent resident participation rate is higher if we consider the participation of new international student graduates in the future. Another 25% of non-permanent residents are in Canada as students without a work permit. They represent future potential workers and those who choose to stay in Canada tend to have positive labour market outcomes.

Slowing population could ease pressure on housing but not long-run supply challenge

Slower population growth might slow house price and rent growth in future years but isn’t likely to solve Canada’s affordability problem.

Population growth doesn’t need to have any impact on the broader supply and demand balance in the economy, because the ability of the economy to produce and the total amount of demand/consumption both increase at the same time. But the mismatch in the timing of demand and the ability of the economy to respond with higher supply can have larger short term impacts. That is perhaps most obvious in housing markets, where increased population increases demand for housing immediately and builders have already been struggling for some time to build enough houses. The result has been an acute shortage of housing and surging rents (along with a spike in home buying costs tied to higher interest rates.)

The shortage of housing in Canada, however, is decades in the making and predates the recent surge in population growth. As we take away some of the housing or rental demand in the near-term, we’re also taking away potential labour supply in construction and building activities that will help build more houses. In the end, it still comes down to addressing the capacity limits on the supply side over the long run to be able to sustainably improve housing affordability.

There is still a growing amount of excess demand for housing in the market currently. Just last year, the 242,000 new home starts lagged far behind the 1.2 million increase in population (approximately 360k new households). Overall, immigration in Canada is still likely to be growing faster than in most, if not all, advanced economies. Capping immigration might take some of the steam out of home price appreciation in 2025 and beyond, but isn’t enough on its own to push home prices lower.

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