March 27, 2024, 08:49 AM

Desjardins Economic Studies on The Economic Impact of Canada's New Immigration Plans; 2nd of 2 Parts

This weakness in real GDP growth will be similarly reflected in the labor market, with employment growth likely to underperform the outlook presented in the latest Economic and Financial Outlook (EFO) of DES. That said, the impact on employment growth should be more modest than for real GDP.

Even though total employment is lower under the reduced NPR scenario, the employment rate would be higher. That's because DES expected the population to fall more than employment. In addition, ongoing labor shortages coming out of the pandemic --

increasing the need for NPRs -- could reasonably be expected to persist to some extent as the population ages.

Although the employment rate increases under the DES reduced NPR scenario, so does the unemployment rate. That's

because NPRs have a lower likelihood of being unemployed than other population groups. So removing them from the labor force entirely means unemployed Canadians could make up a larger share of people either working or looking for work.

The larger negative output gap doesn't help either. That said, DES thought the unemployment rate will be slightly lower by 2030 than in its prior projection as a result of the proposed policy changes. Older Canadians will make up a larger share of the working-age population at that time and have historically been much less engaged in the labor force.

The more modest economic activity and higher unemployment rate should put additional downward pressure on core consumer price index (CPI) inflation in Canada. Total inflation won't be immune either, although diminished by less than core inflation as food and energy prices are less susceptible to cyclical swings in the domestic economy.

The Bank of Canada (BoC) is likely to respond to the economic weakness and lower inflation resulting from fewer NPRs by reducing the overnight policy rate, according to DES. This solidifies the DES base case for rate cuts to start in June. It also suggests that if developments in the economy unfold as presented in this scenario, the base case of DES for more rate cuts than expected by the consensus of economists is even more likely to materialize.

Lower inflation should provide a modest tailwind to real earnings growth, helping Canadians regain more of the ground lost during the pandemic. For individual households, this will be welcome news. But for the economy as a whole, it won't be enough to offset the drag on consumption coming from the slower pace of population growth.

It should be noted that the bottom line of the federal government is likely to be adversely impacted by this change in policy. That's because slower growth in nominal GDP weighs on revenues by more than it and lower interest rates reduce spending. Expect the Government of Canada to run larger deficits and rack up more debt as a result.

For provincial governments, the implications will be more mixed due to the differential impact on program expenses, for example, lower health care costs in the near term combined with a potential need to increase post-secondary education funding due to lower revenues from international student tuition fees.

But in the long run, the analysis of DES suggests that aging will be an inescapable drag on provincial finances and reducing the number of NPRs will only exacerbate pressures on public finances, absent a material boost in productivity.

In conclusion, while slower population growth will help alleviate demand pressures on housing and the delivery of public services, it will also have adverse consequences for the economy, stated DES. If population growth is what largely kept Canada out of recession in 2023, that tailwind to growth is about to largely disappear.

While rate cuts may be coming soon, pent-up demand for housing and still-constrained supply mean affordability likely won't improve much in the foreseeable future, it added. A tidal wave of mortgage renewals at higher rates is just around the corner as well. It has yet to be seen how this will play out in an environment of lower economic activity and higher unemployment.

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