Canada’s high immigration is driving down per-capita GDP: Report

Canada’s GDP has contracted. And a new report says it might be driven in part by high immigration levels

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The Canadian economy experienced a contraction “unprecedented outside a recession,” according to a new analysis from National Bank Financial, a trend driven, at least in part, by a population spike that has squeezed per capita GDP growth.

The bank’s monthly economic analysis says that “signs of an economic slowdown have been multiplying.”

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“Consumption stagnated for the second quarter in a row, a stinging setback in the current demographic context characterized by record population increases,” the report says.

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The recalculated GDP per capita — which the bank’s economists had estimated had contracted by 2.4 per cent — now sits, they say, at a 4.4 per cent contraction during the third quarter.

Mikel Skuterud, an economist at the University of Waterloo, said the simple way to understand it is to think of the GDP as a pie, divided by the population, and the per capita GDP is the slice of pie, theoretically, that every Canadian gets. And so, in theory, if the number of people taking chunks from the same pie goes up, the size of the slice goes down.

“I think you’d be hard-pressed to find any economist in Canada that doesn’t believe that the exceptionally high population growth rates we’re experiencing now have contributed to that decline in GDP per capita that we’re seeing,” Skuterud said.

But it’s also more complex than that. The GDP will go up if anyone in the new population ends up contributing to the GDP, for example. Even if Canada’s population wasn’t growing, “I don’t think we’d be seeing strong growth and GDP per capita because there’s other things happening right now in the economy,” Skuterud said.

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“The decline we’re seeing, though, is astonishing,” he said. “Especially in a period where we don’t think we’re in a recession.”

At the crux of the problem is insufficient growth

The report also finds that while Canada’s inflation rate is at 3.1 per cent, costs for shelter are growing at six per cent annually. Indeed, many Canadian cities have seen big increases in rental house pricing. In Calgary, the average one-bedroom apartment increased by 17.2 per cent between 2022 and 2023.

“While the central bank is responsible for the increase in mortgage interest costs for homeowners, the rise in rental prices is attributable to the staggering increase in population,” it says.

The report says that Canada’s unemployment rate of 5.8 per cent shows that “hiring is not keeping pace with demographic growth.” In just seven months, the bank says, the unemployment rate grew by ten-eighths of a per cent.

“There has only been one rise of this magnitude outside a Canadian recession since the early 1980s, when the tech bubble burst in 2001,” it says.

Last week, the Bank of Canada held its key interest rate steady for the third time in a row. It is at five per cent — the highest it has been since 2001. The bank said that slowing consumer spending was reining in inflation. For five straight quarters, Canada’s GDP per capita has fallen. This metric is used to measure living standards.

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“Unfortunately for Canadians, little turnaround in Canadian living standards appears to be on the horizon,” says a TD Bank report from July.

The first nine months of 2023 saw the single fastest population growth since Confederation. Around one million people joined the Canadian population in that time, exceeding growth in 2022, already a record year for population growth. Since July 1, 430,635 people have come to call Canada home. Just four per cent of that figure was due to newborn babies.

There’s some debate among economists about the extent to which population growth can be blamed for the contracting economy. TD Bank economists, writing back in July, said, “There may be a tendency to pin the blame for Canada’s sagging per-capita showing on the country’s rapidly growing population base given that it has inflated the denominator of the calculation.

“However, at the crux of the problem is insufficient growth in the numerator, which in turn is tied to longstanding productivity issues,” it says.

Realistically, said Skuterud, there are other things going on in the economy, from inflation to the capital-to-labour ratio (think housing versus number of workers) and at any rate, the long-term data don’t show that increased or decreased immigration does anything to Canada’s GDP.

“Some people are going to win, they’re going to benefit from increased immigration, while others are going to lose and so there are important changes in welfare within the population. And I feel like we’re not talking enough about that,” he said.

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