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| Population is distorting Canada's economic picture, pushing interest rates higher than they should be and making the fight against inflation more difficult. (Source: mpamag.com) |
The record wave of immigration is clouding the Bank of Canada's (BoC) economic picture, distorting key statistics and making its fight against inflation more difficult, the article says.
Record population growth
The surge in newcomers, largely due to unplanned arrivals from foreign students and temporary workers, pushed Canada's population growth rate to 3.2 per cent — one of the fastest in the world.
The country has added more than 1.2 million new residents in just one year, boosting GDP growth and consumer demand, leading to higher housing costs while also reducing productivity and increasing unemployment. This is causing consternation for Canadian policymakers and economists.
National Bank of Canada economist Stefane Marion said population growth is making it difficult for the BoC to assess the limits of real interest rates. The BoC raised its benchmark interest rate to 5% in the middle of last year after the economy showed surprising strength, especially in consumer spending.
While policymakers around the world struggle to forecast post-pandemic supply chains, the BoC is the only central bank setting interest rates amid a growing baby boom.
The timing is bad, adding to the risk to the Bank of Canada’s already tarnished reputation as policymakers consider how long they will keep borrowing costs at their highest levels in more than two decades. Marion said no one has calibrated models for this. The Bank of Canada may have misjudged the situation.
Last April, the BoC spent a significant amount of time in its rate-setting meetings discussing how immigration was affecting its interpretation of economic data. When the BoC raised its benchmark interest rate in July, Governor Tiff Macklem assessed the impact of immigration on price pressures as “close to zero.”
However, BoC Deputy Governor Toni Gravelle recently acknowledged that population growth has led to higher housing costs, with mortgage rates and rents being the main drivers of inflation, which hit 3.4% in December 2023. But he also said that in the long run, immigration would help curb inflation, adding 2-3 percentage points to GDP.
Strong population growth makes traditionally used economic indicators harder to interpret, adding another layer of complexity to monetary policy decisions, said Dominique Lapointe, an economist at Manulife Investment Management.
"Health" is unpredictable
The job market is another example of how forecasting is difficult. Job growth must now be viewed in the context of an expanding labor force. In 2019, the economy added an average of 22,000 new jobs per month, and the unemployment rate remained stable. Last year, Canada added about 36,000 new jobs per month, but unemployment continued to rise.
If growth slows in 2024, economists predict Canada's unemployment rate could rise to 6.7% by the end of the year, a rise that would represent the largest deterioration in labor market conditions among G7 countries.
Unemployment increases of that size typically coincide with recessions. But analysts say Canada will likely add jobs in 2024. It's the growth in the workforce that will drive the rate higher.
Marion is one of many economists who say the influx of people into Canada is masking underlying weakness in the country’s economy. Adjusted for population, Canada’s economy hasn’t grown since the second quarter of 2022, after the Bank of Canada began raising interest rates. Per capita GDP, a measure of living standards, fell to 2017 levels last year.
Randall Bartlet, chief economist at Desjardins Group, said population growth is distorting everything and it's really hard to understand the "health" of the Canadian economy at this point.
There are suggestions that a mild recession could occur in the first half of this year, but in per capita terms, Canada has been in recession for some time.
Relying more on labour rather than capital investment also continues to pose risks to Canada's productivity, which has declined for six consecutive quarters, and is a source of criticism for Prime Minister Justin Trudeau's government.
Part of the problem, says Bank of Montreal strategist Benjamin Reitzes, is that the Canadian government is not prepared for the influx. There is not enough investment in all types and levels of infrastructure, and that could be a drag on productivity overall.
(according to Financial Post)
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