A recent report by the Conference Board of Canada has shed light on the potential economic impact of the federal government’s revised immigration strategy. While the rapid reduction in immigration targets is expected to slow economic growth significantly, the report suggests it will not trigger a recession. This article highlights the short-term and long-term financial consequences of the policy shift and provides recommendations for a more balanced approach to managing immigration and financial stability.
On This Page You Will Find:
- An analysis of Canada’s decision to lower immigration targets and its economic consequences.
- How reduced immigration will impact GDP growth, labour markets, and consumer spending.
- The effects on housing affordability and whether reduced demand will ease the crisis.
- Potential fiscal challenges related to lower tax revenues and government spending.
- Recommendations from the Conference Board of Canada for a balanced approach to immigration policy.
- Long-term risks and opportunities associated with adjusting immigration levels over time.
Policy Shift
In October 2024, the Canadian government announced plans to reduce the number of non-permanent residents by over 900,000 within two years. This move followed a sharp increase in immigration in 2023 and 2024, which strained Canada’s housing market, infrastructure, and public services. While the government aims to ease these pressures, the Conference Board of Canada warns that the “hasty course correction” may create new economic challenges.
Economic Growth and GDP Impact
The Conference Board’s report projects that Canada’s real GDP will decline by $7.9 billion in 2025 and $16.2 billion in 2026 due to reduced immigration. This drop could shave 0.3 percentage points off GDP growth during these two years. Unlike a typical economic slowdown, this reduction in GDP is driven by a simultaneous decline in economic supply and demand caused by a shrinking population. The report highlights that lower population growth will reduce both the number of workers and the number of consumers in the economy, leading to slower growth in output and consumption.
Labour Market Dynamics
The immigration reduction will also profoundly impact Canada’s labour market. Employment levels are expected to fall, but the unemployment rate will decline as the labour supply contracts. According to the report, the unemployment rate will decrease by 0.5 points in 2025 and 0.6 points in 2026. This tightening of the labour market could exacerbate existing labour shortages, especially in industries that rely on non-permanent residents to fill critical roles.
Moreover, the shift in labour dynamics is expected to have an inflationary impact on wages. As employers compete for a smaller pool of available workers, wages will rise, particularly in lower-paying roles. While this wage growth may benefit some workers, it also has the potential to drive up production costs, which could feed into higher consumer prices.
Consumer Spending and Inflation
With fewer people in the country, consumer spending is expected to decline. Real consumer spending is forecast to drop by $6.9 billion in 2025 and $10.8 billion in 2026. However, per-capita spending is projected to increase by 1% compared to baseline predictions. The report attributes this to job losses primarily affecting lower-paying roles, allowing those who remain employed to see higher wage gains that outpace inflation.
Consumer prices will also feel inflationary pressures, though the Bank of Canada’s recent actions may moderate them. The central bank has made “supersized” interest rate cuts to stimulate the economy, including a 50 basis point cut that brought the overnight policy rate down to 3.25%. This move is intended to boost household consumption and investment, but inflationary risks remain with a tighter labour market and rising wages.
Housing Market Impact
Canada’s housing market, which is under immense pressure due to high immigration levels, is expected to see some relief. Reduced population growth will ease demand for housing, leading to a slowdown in housing starts and a stabilization of home price inflation. This could provide some respite for prospective homebuyers and help address the housing affordability crisis, a significant concern in recent years.
Balanced Approach
The Conference Board of Canada recommends gradually reducing immigration targets to balance economic and labour market dynamics. Instead of reaching the 5 percent target reduction in 2027, the report suggests extending the timeline to 2029. This approach would allow Canada’s economy and labour market to adjust more smoothly, mitigating potential risks.
Long-Term Implications
The report underscores the importance of maintaining a sustainable pace of immigration. Over the long term, immigration is a critical driver of Canada’s productive capacity, GDP, and tax revenues. While reducing immigration can ease short-term pressures on infrastructure and housing, it could also negatively affect Canada’s fiscal health and economic growth.
Canada’s economic outlook for 2025 and beyond combines optimism and caution. While GDP growth per capita is expected to recover by mid-2025, the broader implications of a shrinking labour force could hinder future growth. The Bank of Canada’s decision to ease interest rates provides some support. Still, the country’s economic prospects remain vulnerable to changes in immigration policy and other external factors, such as US trade policy.
Fiscal Implications
The federal government’s decision to reduce immigration targets also has fiscal implications. According to a report by RBC economists Cynthia Leach and Rachel Battaglia, lower population growth will reduce overall consumption and employment, shrinking the tax base and government revenues. The economists estimate that this policy shift will result in a cumulative $50 billion negative impact on the federal budget over five years, starting in 2025.
On a positive note, lower borrowing costs have reduced some pressure on the federal government’s fiscal position. With the Bank of Canada’s interest rate cuts, debt-servicing costs have decreased, offsetting some of the negative impacts on the federal deficit. However, economists caution that lower population growth will continue as a fiscal drag over the long term, necessitating a more prudent fiscal policy approach.
Canada’s decision to reduce immigration targets is a double-edged sword. While it addresses the immediate pressures on infrastructure, housing, and public services, it introduces new challenges for the economy, labour market, and fiscal policy. The reduction will slow GDP growth by $7.9 billion in 2025 and $16.2 billion in 2026 while tightening the labour market and increasing wages. The Conference Board of Canada’s recommendation for a more gradual reduction offers a path to mitigate economic risks and ensure a smoother transition.
In the long term, Canada’s economic stability and growth depend on a balanced immigration strategy that supports population growth while managing infrastructure and housing demands. Immigration remains a key driver of productivity, labour market strength, and fiscal health. Policymakers must strike a delicate balance to support Canada’s economic well-being.
Frequently Asked Questions (FAQ)
How will Canada’s lower immigration targets impact economic growth?
The Conference Board of Canada estimates that reducing immigration will slow GDP growth by $7.9 billion in 2025 and $16.2 billion in 2026. With fewer workers and consumers, both economic supply and demand will shrink, leading to slower business expansion and job creation. While a recession is unlikely, economic growth will be weaker, requiring careful policy adjustments to avoid long-term stagnation.
Will reducing immigration help with housing affordability?
Lower immigration levels will ease pressure on Canada’s housing market by slowing demand for new homes. This could stabilize home price inflation and make housing slightly more affordable for prospective buyers. However, it may also reduce construction activity, affecting jobs in the real estate and development sectors. The overall impact will depend on how quickly housing supply catches up with demand in key markets.
What effect will this policy have on Canada’s labour market?
With fewer immigrants entering the workforce, Canada’s labour supply will shrink, particularly in sectors that rely on non-permanent residents. This will tighten the job market, causing wages to rise as businesses compete for fewer workers. While this benefits employees, higher wages could lead to increased production costs and inflation. Additionally, labour shortages in critical industries, such as healthcare and construction, may become more severe.
How will the government’s budget be affected by lower immigration?
Reducing immigration will shrink Canada’s tax base, leading to lower government revenues. RBC economists predict a $50 billion negative impact on the federal budget over five years. With fewer working-age residents contributing taxes, public spending on services and infrastructure could become more challenging to sustain. However, lower interest rates may ease some of the fiscal strain by reducing government borrowing costs.
What is the Conference Board of Canada’s recommendation on immigration targets?
The Conference Board suggests a gradual reduction in immigration targets rather than a rapid decline. Extending the adjustment period to 2029 instead of 2027 would allow the economy and labour market to adapt more smoothly, reducing the risk of labour shortages and economic instability. A balanced approach would help Canada manage infrastructure and housing challenges while maintaining long-term economic growth.
