Canada's economic trajectory is at a pivotal juncture, with a significant shift in demographic trends poised to reshape growth expectations. A recent report by the C.D. Howe Institute, titled “Resetting Expectations: Canada's Economy in a Lower-Immigration Era,” authored by Don Drummond and Parisa Mahboubi, argues that the nation's economic data will increasingly reflect slower population growth, a direct consequence of reduced immigration targets. This demographic recalibration risks being misunderstood by policymakers and markets, potentially triggering policy missteps.
Demographic Constraints Redefining Economic Performance
The core of the C.D. Howe Institute's analysis lies in its projection of subdued economic performance driven by demographic factors. The report forecasts that employment could decline in both 2026 and 2027, even under normal economic conditions. These projected monthly job losses, estimated to be in the thousands, are not indicative of economic weakness but rather a natural outcome of slower population and labour force growth. Similarly, real GDP growth is expected to be significantly lower than previously anticipated. The report projects near-term growth of approximately 0.4 to 0.5 percent, with a long-run average of about 1.2 percent. These figures stand in stark contrast to projections from the federal Spring Economic Update and the Bank of Canada's Monetary Policy Report, which anticipate more robust expansion.
Don Drummond, a co-author of the report, emphasized the critical need for accurate interpretation of economic indicators. "The risk is misreading what's happening," Drummond stated. "Slower growth will look like weakness, but it largely reflects a smaller workforce. Treating it as a demand problem risks triggering policy responses that could make things worse." The report meticulously distinguishes between cyclical economic downturns and structural changes, developing benchmarks based on demographic trends to illustrate how much of the anticipated slowdown is attributable to a reduced labour supply rather than faltering economic fundamentals.
Implications for Fiscal Sustainability and Policy Calibration
The divergence between the C.D. Howe Institute's projections and official forecasts has substantial implications for Canada's long-term fiscal health. If economic growth follows the baseline scenario outlined in the report, cumulative real GDP could be approximately 11.5 percent lower by 2060 compared to official projections. This projected gap translates into structurally weaker government revenues and increased debt pressures over time. Consequently, fiscal projections that rely on demand-driven growth to bridge the gap between supply-constrained and official growth paths may significantly underestimate the long-run fiscal challenges facing the nation. The analysis underscores the necessity for policymakers to align their strategies with the evolving demographic landscape to ensure sustainable economic management.
Navigating a New Economic Era
The report's findings suggest that Canada is entering a new economic era shaped by reduced immigration. This necessitates a fundamental reset of expectations regarding economic growth. Policymakers and market participants must develop a nuanced understanding of how demographic shifts influence economic data. By creating benchmarks grounded in these demographic trends, the C.D. Howe Institute aims to equip stakeholders with the tools to interpret economic performance accurately. This proactive approach is crucial for formulating effective and appropriate policy responses that address the realities of a lower-immigration environment, thereby safeguarding Canada's long-term economic prosperity and fiscal stability.