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Immigration surprises are making the Bank of Canada's job harder



Canada is experiencing a record-breaking influx of immigrants, creating economic complexities for the Bank of Canada and challenging conventional policy measures. The surge in newcomers, primarily fueled by an unexpected rise in foreign students and temporary workers, has propelled the country's population growth rate to 3.2 percent, among the highest globally. While this has positively impacted gross domestic product (GDP) and consumer demand, it has also introduced challenges, making the Bank of Canada's battle against inflation more intricate.


The unprecedented population growth, totaling over 1.2 million new residents in a year, has influenced key economic indicators, including housing costs, productivity, and the unemployment rate. Policymakers and economists find themselves grappling with a unique puzzle, complicating the central bank's ability to gauge the true impact of interest rate restrictions.


Stefane Marion, Chief Economist at the National Bank of Canada, questions whether the recent interest rate hikes were justified, considering they were driven by a population surge beyond the bank's control. This demographic shift is uncharted territory for the Bank of Canada, which is setting rates amid an accelerating population boom, adding an element of risk to its credibility.


The timing is inconvenient, as the central bank attempts to navigate the economic landscape and decide how long to maintain borrowing costs at their highest level in over two decades. Marion highlights the lack of calibrated models for this type of population flow, making it challenging for policymakers to make informed decisions.


The Bank of Canada's struggles were evident in its rate-decision meetings, where considerable time was spent discussing the impact of population flows on economic data. While Governor Tiff Macklem initially downplayed immigration's effect on price pressures, Deputy Governor Toni Gravelle later acknowledged that population growth had contributed to higher housing costs, a significant factor in the country's inflation.


Economists, including Dominique Lapointe of Manulife Investment Management, emphasize that immigration has introduced a layer of complexity to monetary policy decision-making, making traditionally used economic indicators harder to interpret. This complexity extends to the job market, where employment gains must now be considered in the context of the expanding labor force.


Despite the positive impact on GDP and housing prices, some economists, including Marion, argue that the influx of people is masking underlying economic weaknesses. After adjusting for population, Canada's economy has not grown since the second quarter of 2022, raising concerns about the sustainability of the current economic trajectory.


Furthermore, the reliance on labor over capital investments poses risks to Canada's labor productivity, which has declined for six consecutive quarters. Critics, such as Benjamin Reitzes of the Bank of Montreal, suggest that insufficient government investment in infrastructure has hindered broader productivity, underscoring the need for better preparation for future population surges.


As the country heads into 2024, economists forecast a slowdown in growth, with an expected rise in the unemployment rate. Despite potential challenges, the unique economic landscape fueled by immigration remains a focal point for policymakers and analysts alike, as they grapple with decoding economic indicators and understanding the true health of Canada's economy.


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