The main risk underlying the Canadian economy has shifted from high inflation to high unemployment and slowing growth.
While immigration restrictions could temporarily curb unemployment and housing costs, they could also undermine Canada’s growth.
The government’s recent restrictions on immigration reflect its attempt to respond to these shifting dynamics. But while these restrictions could temporarily curb unemployment and housing costs, they could also undermine Canada’s potential growth by tempering workforce growth.
With inflation at 2.5 per cent and on track to reach the Bank of Canada’s 2 per cent target next year, economic growth has also slowed. The unemployment rate rose to 6.6 per cent as population growth through immigration outpaces job growth.
The Bank of Canada recently announced three consecutive 25 basis-point rate cuts and promised more to come, though rates remain restrictive.
The federal government in recent months has imposed immigration restrictions to alleviate pressures on housing prices and limit unemployment.
The shift in immigration policy is part of the rebalancing of the Canadian economy, which has been sluggish but is poised to recover next year as rate cuts take hold.
More restrictive immigration policy
Canada faced a severe labour shortage during the pandemic across industries, including trucking, construction, agriculture and food services.
In response, the federal government loosened immigration policy, raising the target for new permanent residents to 450,000 to 500,000 per year.
The government also expanded temporary worker programs, created additional streams for certain industries, allowed visitors to apply for work permits once already in the country, and permitted international students to work over 20 hours per week.
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These measures attracted an influx of temporary foreign workers and international students.
Last year, Canada’s temporary residents jumped to 2.5 million, or 6.2 per cent of the population.
The number of temporary residents who hold work permits is over 1.3 million. Canada had the highest population growth rate since 1957, almost entirely driven by immigration.
The bulk of the workforce growth did not come from new permanent residents but from temporary residents, especially temporary workers—a category that was previously not capped and received relatively little attention.
But with rising unemployment and a soft labour market, the federal government has pulled back on these programs.
The number of temporary residents is now capped at 5 per cent of the population. The number of international students this year is capped at two-thirds of last year’s intake, but international student enrolment decreased even more, estimated to be down by 45 per cent this fall compared to last year.
The temporary policy that allowed students to work more than 20 hours a week also ended this year.
Employers in high-unemployment areas (6 per cent or higher) will face restrictions on hiring low-wage temporary foreign workers, with exceptions in agriculture, construction and health care. In addition, those on visitor visas can no longer apply for work permits while in the country.
Growth at risk
Immigration has been a key driver of Canada’s economic growth, helping the country avert recession by bolstering aggregate consumer spending at a time when per capita spending dropped as households hit by high mortgage interest payments tightened their purse strings.
Immigration restrictions could undermine growth next year and contribute to a tight labour market when hiring picks up.
In university towns where local economies depend heavily on international students, the new restrictions could dampen growth in sectors like housing, retail and services.
Some colleges and universities that rely on international students as a major revenue source may face financial difficulties as they adjust to lower enrollments.
The restrictions will reduce the number of new consumers and workers in the economy, potentially slowing GDP growth. As Canada enters a recovery phase, it will need consumers already inside Canada to increase spending to compensate for the slowdown in immigration-fueled growth.
With Canada’s aging population, immigrants play a vital role in maintaining a robust labor force.
The majority of immigrants are young and of working age. Over the past decade and especially since 2021, immigration has played an increasingly important role in growing the labour force.
Restrictions could reduce the country’s long-term growth potential.
Job market
The unemployment rate has been steadily rising since the beginning of last year as restrictive interest rates discourage employers from hiring. Workforce growth through immigration has been outpacing demand for labour.
The job market is particularly challenging for new entrants, including youths and newcomers, who face unemployment rates notably higher than the national average.
The unemployment rate among returning students surged to the highest level in over a decade excluding 2020. The unemployment rate among new immigrants rose more than that of the general population.
By limiting workforce growth, immigration restrictions could temporarily tighten up the job market and limit the unemployment rate. When hiring eventually picks up, businesses would need to hire from within Canada rather than turning to bringing in foreign workers.
But in the long run, limiting immigration can result in new labour shortages, especially in sectors like health care and trucking, which still have a need for workers.
While a tighter labor market can drive innovation and productivity gains, it also risks driving up wages and, ultimately, consumer prices.
Housing
The impact of a tighter immigration policy is beginning to be seen in the housing market, especially the rental market. Rents rose by only 3.3 per cent in August, the slowest year-over-year increase in nearly three years.
This occurred in part because of an increase in supply from new condos coming onto the market and in part from lower demand because of lower immigration numbers.
But this effect is temporary. After all, Canada’s housing shortage is a supply issue, stemming from years of structural under-building.
Restricting immigration can slow down demand for housing in the short term, but over the long term, new housing is not being built fast enough to meet demand as immigrants as well as millennials and Gen Z look to buy.
Furthermore, the construction industry itself relies heavily on immigrant labour. Restricting immigration could result in a worsened talent shortage, causing delays in construction and higher labour costs, and, ultimately, higher housing costs.
To address this supply issue, it would be more effective to prioritize boosting housing supply rather than attempting to curb demand.
The takeaway
Canada’s shifting immigration policies highlight the delicate balance between addressing short-term economic concerns and safeguarding long-term growth.
While the recent changes are intended to address immediate concerns like the housing shortage and rising unemployment, they may also limit labour force growth and consumer demand, which only hurts future growth.
A more sustainable long-term strategy could focus on investing in innovation, automation and productivity improvements to address labor shortages, even as immigration remains an important driver of economic growth.
Capital investment, upskilling the workforce, and investing in productivity will be key to the long-term success of the Canadian economy.
