Policymakers should be prepared for a 'new reality' after immigration cuts, think tank warns

OTTAWA — Upcoming economic data is at risk of being misread by Canadian policy makers if they don’t fully appreciate the effects of recent cuts to immigration and the number of temporary foreign workers, a new report warns.

The report, to be published Wednesday by the C.D. Howe Institute, says the reductions will mean short-term dips in Canada’s population, which will make key data such as total employment and economic growth look more sluggish than the reality.

The think tank’s report warns that any misinterpretation of the data could lead to counterproductive stimulus, such as unnecessary interest rate cuts or new spending.

“There’s concern that they won’t recognize that that’s the new reality,” said Don Drummond, a former senior executive at the Department of Finance and now a fellow-in-residence with C.D. Howe.

Drummond said the recent cuts to immigration and temporary foreign worker levels were the right calls because Canada didn’t have the housing or health-care capacity to support the previous levels. The challenge, he added, is to understand that the new, lower levels will automatically have an effect on other statistics that are in part a reflection of population changes.

The new report forecasts that total Canadian employment will decline this year and next and that inflation-adjusted economic growth will be between 0.4 and 0.5 per cent in the near term. It also forecasts that employment will fall by 54,000 this year and another 17,000 in 2027, assuming that the economy is neither overheated nor lacking demand.

But those middling numbers are in part a function of demographic changes. “The risk is not poor performance,” the report stated, “but misinterpretation.”

Like many industrialized countries, Canada has a modest birth rate and an aging population and must therefore rely heavily on immigration to maintain population growth and enough workers.

Immigration levels peaked in 2023 and 2024, topping 472,000 in each year. Federal government immigration targets for 2026 have been lowered to 380,000, however, and will inch down to 365,000 next year. The number of new temporary residents, such as foreign post-secondary students and temporary foreign workers, were also cut last year by about 50 per cent.

The past increases in both immigration and temporary residents added pressure in many Canadian communities on housing and health care services.

It’s unclear how much of an impact the population changes have had on policy makers.

The federal government’s fiscal policy has in recent years clearly favoured stimulus, with a string of heavy deficits. The Bank of Canada, meanwhile, has been trying to keep a lid on prices as conflict in the Middle East has increased oil prices and added inflationary pressure.

Speaking to a parliamentary committee Monday, Bank of Canada Governor Tiff Macklem told MPs that the central bank is prepared to do whatever is needed to fend off inflation.

Less than a week earlier, the Bank of Canada kept its key interest rate at 2.25 per cent for the fourth consecutive time, while acknowledging that the war in Iran has added uncertainty to the Canadian economy. Inflation rose to 2.4 per cent in March, but has stayed near 2 per cent for the last year.

National Post

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