Coming Off Immigration Rush Could Weigh on Economic Indicators, but That’s Not Cause for Alarm: Report

The Bay Street Financial District is shown with the Canadian flag in Toronto in a file photo. The Canadian Press/Nathan Denette

As Canada’s economy adjusts to a lower-immigration era after years of record population growth driven by immigration, key economic indicators are likely to decline—but this signals a normal readjustment rather than a cause for alarm, according to a new report from the C.D. Howe Institute.

The report, released May 6, says the country will likely see slower GDP growth, declining employment, and weaker growth of the workforce in the coming years as immigration levels fall from highs under the Trudeau administration.

However, rather than reflecting a real economic crisis, weaker economic numbers in coming years are likely to mark a normal readjustment of the economy to lower immigration-driven population growth rather than a real economic downturn, according to the report.

“These are not signs of a struggling economy,” the report states. “They are what a normally operating labour market delivers, given the demographic shifts underway.”

Projections

The report by C.D. Howe Institute economist Don Drummond and associate director of research Parisa Mahboubi projects that employment levels are likely to decline and GDP growth is likely to slow sharply this year and next year, even if there is no recession or significant economic disruption.

“Canada’s economic landscape has shifted fundamentally,” the authors write. “After years of immigration-driven population and labour force expansion, the federal government has sharply reduced immigration targets.”

The authors model a baseline scenario in which the average immigration rate accounts for roughly 0.9 percent of Canada’s population instead of 1.1 percent in a scenario of high immigration growth.

Under this baseline scenario, the report estimates that the Canadian economy is likely to increase by approximately 1.2 percent per year on average between 2026 to 2060.

Primarily as a result of reduced immigration, the report projects that real GDP growth “on a supply basis” is likely to slow considerably this year in particular to roughly 0.4 percent, even if the economy functions normally. It projects GDP growth of 0.5 percent next year.

“On a supply basis” refers to the economy’s productive capacity, including labour supply, hours worked, and productivity, rather than consumer demand or government spending.

Statistics Canada reports that Canada’s real GDP increased 1.7 percent last year, the slowest pace of yearly growth since 2020. So far this year, StatCan says GDP went up 0.1 percent in January and 0.2 percent in February, and remained “essentially unchanged” in March.

An advance estimate for GDP growth in April will be released May 29, according to StatCan.

“A central implication is that economic performance may appear weaker than in the past, even when the economy is operating close to capacity,” the report notes, adding that “the risk is not poor performance, but misinterpretation.”

A paper last year from economist Jim Stanford argued that lower immigration levels could improve per-capita GDP even if they slow overall GDP growth.

In particular, Stanford said that rapid population growth driven by immigration has been putting downward pressure on per-capita GDP because “GDP has grown but not as fast as the population” and said “any surge in immigration will normally result in lower average per capita GDP.”

Reset

The report’s projection of GDP growth of 0.4 percent for this year falls considerably below the estimate in last month’s spring economic update from the federal government, which forecast GDP growth of 1.1 percent for 2026 and 1.9 percent for 2027 and 2028.

Cyclical economic challenges worsened by trade tensions with the United States will be important to distinguish from normal slowdown caused by a decline in immigration, the report warns, particularly for the federal government and the Bank of Canada in making their decisions.

“The Bank of Canada faces an environment in which weak employment and output data may reflect supply contraction rather than demand shortfall. In this context, easing aggressively in response to demographic-driven softness could be premature,” the report states.

Drummond and Mahboubi go on to caution that a lower-growth economy could lead to a significant lowering of federal revenue along with higher deficits.

“The implications for fiscal sustainability are significant,” the report reads, adding that if growth follows the baseline scenario rather than official projections, the level of Canada’s real GDP could be approximately 11.5 percent lower by 2060.

“Lower output directly reduces revenue growth and, absent offsetting policy measures, leads to higher deficits and debt ratios.”