Focus
July 10, 2026 | 13:45
Net Zero Population: Bad News or Good?
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Net Zero Population: Bad News or Good?Canadian population growth has swung from historic highs to a historic low. Is this good or bad for the economy? |
|
|
Almost 60 years ago, Stanford professor Paul Ehrlich penned the book “The Population Bomb”, which warned of global famine from rapid population growth. The tome landed at a time of widespread concerns of a ‘population explosion’. However, it also landed at a time when birth rates were already well past their peaks, especially in North America, and were in fact in the midst of a deep and sustained decline—which has since given way to concerns about a rapid cooling in populations in many regions. |
It’s with this backdrop of wildly off-base demographic forecasts that we humbly endeavour to assess the economic effects of the recent abrupt reversal in Canada’s population growth, mindful that conditions can change quickly. After soaring to century highs in 2023/24, the number of residents dropped in 2025, marking the first annual decline on record dating back to the 1867 Confederation. While StatCan has indicated that these recent figures could be revised somewhat higher, the shift in population growth in the past two years has no doubt been dramatic. For the economy, this has slashed the growth in the number of potential consumers (from more than 3% to about zero), as well as the growth in the underlying labour force from almost 4% in late 2023 to barely anything now (Chart 1). But is this a good thing or a bad thing from an overall economic perspective? We consider a number of angles: |
|
For Overall Economic GrowthIt is almost an article of faith that economic growth is directly tied to population growth. A recent CD Howe study (“Resetting Expectations: Canada’s Economy in a Lower-Immigration Era,” Drummond and Mahboubi) warned that Canada’s short- and medium-term growth outlook needed to be dialled back due to the big slowdown in immigration flows. The Prime Minister pointed directly to the cooler population as a factor behind the “uneven data” of the two-quarter drop in Canada’s GDP around the turn of the year. And, a recent Globe and Mail piece suggested that both of Canada’s “growth engines”—population and productivity—are now “down”. But is it really that straightforward a link, particularly over the short run? In the past 50 years, there is, in fact, zero correlation between year-over-year population growth and real GDP growth (in fact, it’s a slightly negative correlation); and, likewise, population growth is not a leading indicator of near-term economic growth. There is no doubt that, over the longer term, the growth in the labour force is one of the two key building blocks of economic growth—but the relationship is far from mechanical. Just as one obvious example, Canada had its strongest labour force growth in decades in 2023/24, and yet those years recorded perfectly pedestrian real GDP growth of 2%. Even the much-ballyhooed impact of population growth on the spending side can be overstated; GDP is ultimately a measure of output, and a high portion of spending can flow abroad. Moreover, note that real consumer spending climbed 2.0% y/y in Q1—barely below the 2023/24 pace—even amid the sharp reversal in immigration. This underlying firmness, in a sector that would be highly affected by population shifts, suggests that the so-called technical recession had almost nothing to do with changes in immigration, but was largely caused by deep trade uncertainty. Ironically, while there has been much focus on the absence of GDP growth over the past year, and the deep debate over a technical recession, the economy was arguably much weaker in 2023, when per capita GDP was dropping heavily, masked only by supercharged population growth (Chart 2). That metric has actually turned slightly positive in the past year. The main takeaway is that, yes, much slower labour force growth will ultimately dampen potential output growth—but only over the longer haul, and the relationship is likely not one-for-one. |
For ProductivityThe main reason we do not believe that the link between population growth and economic growth is either mechanical or one-for-one is that productivity growth itself can also be affected by rapid changes in the labour force. The history of the past 40 years suggests that the relationship is negative—that is, faster labour force growth has been consistent with weaker productivity gains (Chart 3). And this was the case even before the wildness since COVID. What’s the theory behind this assertion? After all, some have argued just the opposite, and the number one recommendation of the 2017 Barton report on boosting Canada’s economic performance was “aggressively scaling up immigration”. The theory is twofold: 1) A ready supply of talented and relatively inexpensive workers could dissuade firms from automating and investing in M&E; i.e., it’s easier to expand by simply adding workers than machines. 2) A very rapid rise in the labour force could prompt new entrants to take almost any job that’s available—with lower pay and thus lower productivity (pretty much precisely what happened in 2023/24). A different way to express these two threads is that the capital-to-labour ratio will tilt heavily to the latter and undercut productivity, as investment just can’t, or won’t, keep up with a sudden rush in the labour force. Canada’s strongest sustained run of productivity growth in the past 50 years was during the internet boom in the late 1990s/early 2000s. That boom was accompanied by the slowest five-year stretch of population growth in the post-war era. There’s no evidence that slower labour force growth will hamper productivity. |
|
For the Job MarketAlong with housing affordability, the job market was one of the two key drivers behind Ottawa’s sudden reversal on immigration. In response to one of the tightest job markets on record coming out of the pandemic, the federal government promptly welcomed three million people over the next three years. But as night follows day, that surge tilted the labour market into excess supply, with the youth jobless rate hitting 14.5%, its highest non-pandemic reading since 2010. The ratio of unemployed people to vacant jobs quickly went from almost 1:1 in 2022 to well above 3:1 now. |
At the same time, both the job vacancy rate and the share of firms reporting labour shortages have dropped dramatically from the peaks of just a few years ago (Chart 4). Even with the more recent deep slowdown in the growth of the labour force—and the surprising dip in the overall unemployment rate in the past year—the main takeaway is that the job market is now on the soft side. While some specific industries and professions may be reporting worker shortages, for the macro economy, we remain short of work, not workers. For the Housing MarketThe stall in population growth has had an immediate impact on housing, primarily in the rental market and for investor-dominated small condos. To best capture the massive impact that population growth had, consider that policymakers spent years (unsuccessfully) fighting deteriorating housing affordability on the supply side, but found success with the stroke of a pen when immigration caps (a demand side measure) were put in place. While permanent immigration has remained solid at above 313k, net nonpermanent resident outflows topped 460k over the past year. For the latter, Ottawa is targeting a 5% share of the population from 7.6% at the peak, implying further net outflows ahead. These temporary foreign workers and international students had previously absorbed significant rental supply. And, this comes just as the supply pipeline is loaded with more than 180k rental units. In fact, rental units under construction now outnumber combined condo and homeownership units for the first time (Chart 5). This reflects previously-tight rental markets (projects take a long time to reach completion), and supply incentives that offered favourable financing terms for purpose-built projects. A large share of condos currently under construction is investor-owned, which will add further rental supply in the year ahead, and improved affordability in the resale market could also pull some renters back toward homeownership. For investors, cap rates don’t provide enough cushion relative to risk-free yields to compensate for declining rent, tenant risk, and a lack of price growth expectations. As a result, presale activity in some major cities is scraping recession levels, and should ultimately lead to further declines in residential construction activity. For Inflation and Interest RatesThere’s a general view that the long-term impact of population growth on inflation is neutral as supply and demand factors balance, but we’ve argued that the recent episode was inflationary given the massive and acute nature of the boom. The flip side is that we are now seeing net disinflationary pressure from the sharp decline in population growth, at least for now—the downward pressure in areas like shelter is more immediate than any supply-side pressure that leads to higher wages. Indeed, rent is where we’ve seen the most immediate inflation impact. Rents should continue to fade across many major markets—they already hit a three-year low in May, down 4.7% y/y. The dynamics of ample supply coming to market at a time of negative population growth are toughest in B.C. and Southern Ontario, where rental/condo construction has been strongest, and nonpermanent resident caps are biting hardest. And they are also toughest for smaller bachelor/one-bedroom units that are swamped with supply—larger units are performing better. |
|
Within the CPI, this has pulled down rent inflation to 3.5% y/y from a high of 9.0% at one point in 2024—rent within the CPI is notoriously slow to reflect market conditions (Chart 6). Still, along with declines in mortgage interest costs and homeowner replacement/other costs (i.e., new and resale prices), this has been a major factor pulling most measures of Canadian inflation back down to around 2%. The evidence elsewhere is hard to extract given inflation disruptions around the pandemic, and with rolling geopolitical conflicts. There are signs that the big shifts in population growth have affected transportation services, recreation and health and personal care services—all spots you’d expect to see prices move when existing infrastructure is stressed (and then relieved) by a sudden population swing. Bottom Line: Table 1 summarizes neatly our view on how various aspects of the economy have been affected by the whiplash in population growth in the past seven years. In short, while we wouldn’t see the deep slowdown as necessarily a “good” or “bad” thing, it was likely a necessary step to correct the excesses of earlier years. Those excesses led to a weak job market (especially for young workers) and very weak housing affordability. There has been progress on both counts, but we’re not there yet. We can conclude, though, that a more stable, predictable and sustainable immigration policy would be a “good” thing for the economy. |