Introduction to Canada’s Economic Outlook
The future of Canada’s economy is uncertain, with a debate raging over whether the Bank will cut interest rates again. Economists are analyzing the latest data, forecasts, and signals from the U.S. Federal Reserve to make their predictions. However, a new factor has entered the picture: Canada’s new immigration targets.
The Impact of New Immigration Targets
Last week, the federal government announced plans to reduce the share of temporary residents to less than 5 per cent by 2027. This move will result in a significant decrease in the number of new temporary residents, from 674,000 in 2025 to 385,000 in 2026. According to Capital Economics, this reduction could lead to Canada’s population growth slowing to "essentially zero" over the next two years. This is a far cry from the Bank’s forecast of 0.5 per cent growth.
Effects on Unemployment Rate
The decrease in immigration is likely to cause the unemployment rate to fall faster than expected. Stephen Brown, deputy chief North America economist at Capital Economics, believes that "the more likely outcome of lower immigration is that it will cause the unemployment rate to fall faster than we forecast." The recent drop in Canada’s jobless rate from 7.1 per cent to 6.9 per cent in October, combined with a gain of 67,000 jobs, has already led many to predict that the Bank will not cut interest rates in December, and possibly for an even longer period.
Breakeven Employment Growth Rate
In its October monetary policy report, the Bank estimated that the breakeven employment growth rate will fall to 5,000 jobs a month, or 0.3 per cent year over year. However, if population growth is zero, Capital Economics warns that breakeven employment could be negative. This means that the unemployment rate would fall even if there were no net job creation. As Brown noted, "in that environment, the unemployment rate would fall by 0.2 percentage points per year even if there were no net job creation."
Implications for Interest Rates
This scenario would make the Bank more cautious about lowering interest rates, as easier policy could reignite inflation. Brown added that "given the lack of any meaningful fiscal stimulus in the budget last week, these new immigration targets are the bigger risk to our view that the Bank will resume cutting interest rates next year."
Conclusion
In conclusion, Canada’s new immigration targets have added a layer of complexity to the country’s economic outlook. The potential reduction in population growth and its impact on the unemployment rate may lead the Bank to rethink its interest rate strategy. As economists continue to analyze the data, one thing is certain: the future of Canada’s economy is uncertain, and only time will tell how these new targets will shape the country’s economic landscape.
