Trudeau’s new policy upshot? First population decline since 1867
THE CANADIAN PRESS/Sean Kilpatrick
Prime Minister Justin Trudeau and Immigration, Refugees and Citizenship Minister Marc Miller are joined by fellow members of Parliament as they hold a press conference on Parliament Hill in Ottawa on Thursday, Oct. 24, 2024.
It was a spectacular economic policy error, followed by a spectacular reversal.
Prime Minister Justin Trudeau’s government announced on Thursday that it will implement dramatic cuts to immigration flows, bringing Canada's rapid population growth to an abrupt halt. The move, aimed at easing a housing crisis after an unprecedented increase in immigration over the past two years, could have significant effects on wages, interest rates, and the broader economy.
The details
The government will cut the number of permanent residents from 485,000 in 2024 to 395,000 in 2025, 380,000 in 2026, and 365,000 in 2027. This is a dramatic shift from the initial target of half a million new permanent residents annually in 2025 and 2026, which would have set a record. In comparison, the number of new permanent residents was 341,000 in 2019.
Temporary permits for students and workers will also be limited, significantly reducing the number of non-permanent residents. The result is expected to be a reduction in this category of nearly 1 million people by the end of 2026. This means a drop in international migration - permanent and non-permanent - of about 115,000 in 2025 and 2026, with an overall population decline of around 0.2 per cent per year in both those years.
This marks an extraordinary outcome. Since its founding in 1867, Canada has never recorded a one-year decline in population. However, after two years of population growth at an unprecedented three per cent annual rate, these new measures would bring average population growth for the decade back to around 1.3 per cent, much closer to historical norms.
The consequences
Housing market relief: The lack of population growth should start to ease the strains on the housing market by allowing supply to catch up with demand. New home starts are tracking about 250,000 this year, versus a 1.3 million increase in the number of people living here.
Labour market tightening: The reduction in immigration will likely result in a decline in the number of unemployed workers. Canada's jobless rate has risen sharply over the past 18 months, driven by the influx of newcomers. A tighter labor market could help lift wages as well, although it may take time to materialize.
Slower economic growth: The Bank of Canada had been projecting economic growth of 2.1 per cent in 2025 and 2.3 per cent in 2026, based on an assumption of 1.7 per cent annual growth in the working-age population. That assumption no longer holds, and the country should expect significantly slower projected economic growth as a result of these new policies, especially given our sluggish productivity growth.
Interest rate uncertainty: While lower pressure on housing costs may ease inflation concerns, the broader economic slowdown could diminish the Bank of Canada’s appetite for aggressive interest rate cuts. More of that below.
What are the lessons?
The government’s decision to rapidly ramp up immigration post-pandemic created an unnecessary shock to Canada’s economy that will have lingering effects. Worse, the population surge has shaken the broad public consensus in favor of immigration, a consensus that had been one of Canada’s greatest competitive advantages.
The influx of newcomers—both permanent and temporary—was unsustainable. It exacerbated housing shortages, stressed public services and strained the job market. Despite the government’s current narrative, the negative consequences of this policy were entirely predictable. Here’s a column from a year and a half ago warning of exactly this.
How did the government misjudge the situation so badly? Part of the problem lies in the peculiar dynamics of the pandemic, which made it difficult to assess the economy’s real needs. For instance, labour shortages were overstated due to policies implemented during Covid. The government helped create the labour shortages that they then felt the need to respond to.
But there was also misplaced confidence in the government’s ability to engineer major change.
Many ambitious governments like Trudeau’s saw the pandemic as a global inflection point that empowered them to rethink the status quo.
There’s no question that Trudeau emerged from the crisis with an elevated sense of confidence and a belief he had an expanded mandate to pursue transformative change. Leaders who successfully navigate crises often do.
Ambition, however, has a way of outpacing reality.
A good-looking story?
Almost lost amid the immigration news was the Bank of Canada’s decision to cut interest rates by half a percentage point on Wednesday.
A 50 basis-point cut is usually reserved for crises, and it’s been more than two decades since the central bank made such a move outside an emergency. But Governor Tiff Macklem was quick to downplay concerns. “It’s a pretty good-looking story: lower inflation, lower interest rates, and a pickup in growth,” he said during the subsequent press conference.
The central bank has cut rates by 1.25 percentage points since June and expects to continue easing, now that inflation is back to its 2 per cent target. Despite the recent cuts, borrowing costs remain elevated for an economy that is showing signs of weakness. And more rate cuts are expected: economists predict at least another percentage point of easing over the next few quarters.
Based on new forecasts this week, the Bank of Canada believes the combination of the lower interest rates (which should spur household consumption) and strong U.S. growth (which should boost exports) will help our economy rebound after two years of extremely sluggish growth. The forecasts call for growth of 2.1 per cent next year and 2.3 per cent in 2026.
The federal government’s immigration move, however, casts serious doubt on whether things will play out like that. To be sure, slower growth will make the Bank of Canada uneasy—which could give it reason to continue cutting interest rates. At the same time, the potential loss of hundreds of thousands of workers will do a lot of heavy lifting in terms of eliminating slack in the economy. The bank is trying to bring down unemployment, which it had forecast would be elevated through the end of 2025.
The main rationale to drive down interest rates to stimulative settings may no longer hold.
