Immigration Canada
iStockphoto/kellyvandellen

While federal efforts to curb immigration will weigh on economic growth in the short term, the policy shift represents a return to pre-pandemic norms, rather than a new era of restricted immigration, says Morningstar DBRS.

In a new report, the rating agency examines demographic trends in Canada and Australia, which have both enjoyed strong immigration-driven population growth in recent years, and are now both seeking to stem the flow of new arrivals.

“Tighter immigration restrictions will have an economic impact in the near-term, particularly in Canada, where a mild contraction in the labour force will likely dampen headline growth in 2025 and 2026,” it said.

In particular, a sharp decline in the number of temporary foreign workers “could put downward pressure” on the unemployment rate, and even create labour shortages that put upward pressure on wages in industries that currently rely heavily on temporary foreign workers, the report suggested.

However, the overall impact of reduced immigration on inflation “is unclear,” it said, noting that changes in the labour force will affect both the demand and supply sides of the economy.

In Australia, reduced immigration isn’t expected to impact its labour market, as most of the shift targets a reduction in foreign students, not foreign workers. As a result, the overall economic impact is also expected to be more modest, it noted.

Both countries may see a modest reduction in housing demand as a result of their shifting immigration policies, yet DBRS said that this won’t be enough to address housing affordability issues in either country, given the prevailing supply constraints.

Ultimately, the shifts in immigration policy don’t materially alter the medium-term growth outlook for either country, relative to the pre-pandemic period, the report said.

“In our view, the recent policy changes in Canada and Australia do not intend to initiate a new era of restrictive immigration, but rather aim to put immigration flows on a more sustainable footing following a massive surge in arrivals in 2023 and 2024,” it said.

In Canada, the federal government has reduced its targets for permanent residents from 500,000 per year to 395,000 this year, 380,000 in 2026 and 365,000 in 2027, it reported. The revised targets are still high relative to pre-pandemic levels, DBRS said.

And, while the government’s targets are more aggressive when it comes to non-permanent residents (NPRs) —where it aims to reduce the share of the population comprised of NPRs from 7.4% in 2024 to 5% by the end of 2026 — DBRS said it’s “unlikely” that the government will meet its targets, “given the difficulty of implementing such an aggressive reduction …”

In the medium term, the rating agency sees the shift in immigration targets as a return to their historic norms.

“Even with federal elections approaching in both countries this year, we expect that the consensus across the political spectrum on the long-term benefits of immigration will likely endure,” it concluded.