High Immigration Impacting Economic Well-Being: National Bank Economists

People walk along a street in Montreal on Nov. 29, 2020. Graham Hughes/The Canadian Press

Canadians are currently facing a challenge to their economic well-being due to high immigration, National Bank economists highlighted in a Jan. 15 report.

Economists Stéfane Marion and Alexandra Ducharme described the phenomenon as a “population trap,” a first for Canada in modern history. This concept, as defined by Oxford Reference, is a situation where no increase in living standards is possible due to rapid population growth consuming all available savings necessary to maintain the existing capital-labour ratio.

“We agree that immigration is good for our potential GDP, but all good things have their limits,” the economists wrote in response to recent comments from Deputy Prime Minster Chrystia Freeland praising immigration. They say the current population growth appears “extreme” when considering the economy’s absorptive capacity, with the challenge being the most evident in housing.

The National Bank economists note the federal government has introduced programs to increase housing supply, but doubt it can solve the issue. To meet current demand and reduce shelter cost inflation, they say Canada would need to double its housing construction capacity to approximately 700,000 starts per year, a goal that seems unattainable under current conditions.

Concerns about rapid population growth via immigration have been raised by economists from other major Canadian banks in recent months.

In a Dec. 19 note evaluating recent inflation figures, Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, stated that the rapid pace of population growth in Canada is contributing to increased inflationary pressures.

In July, TD Bank economists called the population surge a “textbook demand shock” and said policymakers need to find the right balance to better absorb newcomers within economic and social infrastructures.

Canada experienced an unprecedented population increase of over 1.2 million in 2023, following a substantial rebound in 2022 after the COVID-19 recession. This growth rate is significantly higher than historical figures, dating back to 1949 when Newfoundland joined the federation.

Canada’s population growth in 2023 was 3.2 percent, five times the Organization for Economic Cooperation and Development’s (OECD) average, the National Bank economists noted. All 10 provinces grew at least twice as fast as the OECD, with growth ranging from 1.3 percent in Newfoundland to 4.3 percent in Alberta.

This rapid growth presents challenges, particularly in housing, where the supply deficit reached a record high. Only one housing start was recorded for every 4.2 people entering the working-age population, far below the historical average of 1.8, the National Bank economists said.

They noted that real GDP per capita has stagnated for six years, indicating that population growth above a certain threshold can hinder economic well-being. The country’s poor productivity record is also a cause for concern, say the economists, potentially linked to demographic ambitions outpacing available capital.

Moreover, the decline in the private non-residential capital stock to population ratio, which has been ongoing for seven years and is currently at its lowest since 2012, further exacerbates the issue, the economists added. This is in stark contrast to the United States, where the ratio is at a record high.

The National Bank economists suggest that Canada’s population goals should be set against the constraint of its capital stock, extending beyond housing supply, to improve productivity. They propose that annual total population growth should not exceed 300,000 to 500,000 to escape the population trap.