The federal government is curbing one of the primary drivers of economic growth over the past couple of years — immigration — and the move is boosting confidence in the downward trajectory for interest rates, says Desjardins Group.
On Thursday, the government outlined its plan to cut the number of new permanent residents admitted to Canada in the year ahead.
Combined with existing plans to reduce the ranks of temporary residents, the shift in policy is likely to mean “population growth almost grinds to a halt next year,” according to a new report from Desjardins economists.
“That would represent an incredible swing from the historically high 3%-plus population increase seen in 2023,” it said.
While this demographic shift looks dramatic, the short-term economic implications may not be as severe, the report noted.
“A reduction in permanent resident admissions will put roughly equal downward pressure on both the demand and supply sides of the economy,” it said.
While fewer workers means fewer consumers, it may also allow for higher wage growth and lower housing costs, enabling stronger household consumption on a per capita basis, the report noted. It also sets the stage for possible labour shortages to arise late next year.
Ultimately, Desjardins said it continues to see the Bank of Canada eventually cutting rates to 2.25% in 2025, and the shift in immigration policy provides “even more confidence” in its rate outlook.
Longer term, the implications of the shift may be more significant.
“The goal of this plan is to allow time for the supply of housing and infrastructure to catch up with demand,” the report said. “But with a rapidly aging demographic, that near-term objective will come at the expense of solving Canada’s longer-term labour force constraints.”