In a recent opinion piece for The Globe and Mail, Alberta Central’s Chief Economist, representing Credit Unions of Alberta, shared his thoughts on the economic challenges of cuts to immigration targets and the associated drop in population growth, especially in a context where the Canadian economy has been maintained afloat by the strong rise in population in recent years.
The main points are:
- Without strong population growth, the Canadian economy would have experienced a recession. This is because, while we are consuming less per person, more consumers means that aggregate spending continues to grow.
- The economy’s potential growth will be significantly lower, and stalled population growth will be an important headwind on domestic demand. However, whether it will lead to more or less slack in the economy will likely depend on whether per capita spending improves or not.
- The certainty is that growth in Canada will be much lower in 2025 and 2026 than initially thought.
The implications for monetary policy are two-fold: 1) a faster reduction in the policy rate is likely required to ensure a recovery in individual spending, 2) The lower potential growth means the neutral rate is likely lower than initially thought, meaning that the terminal policy rate in the current cutting cycle is lower than currently expected. This is why Gov. Macklem recently said that the Bank of Canada may need “to discover” where neutral is.
However, we should be concerned with the potential impact of much lower interest rates and a potential return to the unsustainable growth model of the past decades that was based on ever-growing household borrowing, especially residential mortgages, that crowded out business investment, leading to Canada’s poor productivity record over the past three decades. In the upcoming 2025 Economic Outlook, these themes will be further explored.