2024-03-28 03:34:58
Is an interest rate cut expected? Canada’s eviction order helps reduce inflation (FatCamera via Getty Images)
The Canadian government recently announced a plan to set a cap on the number of temporary residents. Some analysts believe that this may make interest rate cuts come sooner and more frequently, but it may have adverse consequences for the overall economy.
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According to the plan announced by Immigration Minister Marc Miller on March 21, the proportion of non-permanent residents (NPR) will be reduced from the current 6.2% of the population to 5% in the next three years.
“Such a large decline in net NPR would be unprecedented,” Randall Bartlett, senior director of Canadian economics at Desjardins, wrote in a report. He said the change would have a “significant impact” on the economy.
Bartlett believes these changes make it more likely that the Bank of Canada will cut interest rates in June, because if this scenario holds, “a rate cut larger than economists expect will be more likely to become a reality.”
Bartlett said reducing the NPR population by 500,000 to about two million would result in more NPR leaving Canada than entering Canada, and the change “forces us to significantly lower our population growth projections.”
Canada’s rapid population growth has been a focus of recent political and economic issues, particularly its impact on housing. Miller had announced a 35% reduction in the number of international student visas two months ago.
Impact on economy and employment
According to the plan announced by Immigration Minister Marc Miller on March 21, the proportion of non-permanent residents (NPR) will be reduced from the current 6.2% of the population to 5% in the next three years. Canada’s rapid population growth has been a focus of recent political and economic issues, particularly its impact on housing. Miller had announced a 35% reduction in the number of international student visas two months ago. (NurPhoto via Getty Images)
Based on last week’s announcement, Desjardins expects Canada’s chronically weak real per capita economic growth to be “better than previously expected” due to gains in productivity, but population growth will be significantly lower, leading to a decline in overall real GDP growth.
He estimated the employment situation to be mixed, with the bank expecting job growth to slow but remains optimistic. However, the unemployment rate should rise because NPRs are less likely to lose their jobs than other groups. “So removing them from the labor force means that unemployed or unemployed Canadians make up a larger share of the overall population.”
Bartlett wrote that as unemployment rises and real GDP growth slows, it will put downward pressure on inflation, opening the door for the Bank of Canada to cut its benchmark interest rate, possibly faster than previously forecast.
Lower inflation should also “give a slight boost to real wage growth, helping Canadians recoup the income they lost during the pandemic.” He said that was good news for individuals, but “not enough to offset the drag on consumption from slower population growth.”
Desjardins pointed out that for the federal government, these changes may lead to a decrease in revenue, which means an increase in the deficit and federal government debt; at the provincial government level, some results may be achieved in the form of lower medical costs, but “people are inevitably aging. It will drag down provincial finances. Reducing the number of non-permanent residents cannot substantially increase productivity and will only intensify the pressure on public finances.”
He said that although changes in immigration policy will ease the tight supply of housing and public services, the impact on the macro economy may be considerable. “If Canada’s avoidance of recession in 2023 is largely due to population growth, then the driver of growth will essentially be gone.”
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