After 'critical errors' on immigration, what's the upshot for Canada?

Portfolio manager offers perspective on economic pressures, market implications from sharp influx of new Canadians

After 'critical errors' on immigration, what's the upshot for Canada?

Among many others, a major point of pride for Canada has been its diversity, supported by a welcoming attitude toward new Canadians. But as the country faces a prospective recession and a bevy of economic pressures, leading voices in the financial sector have spoken out against the federal government’s policy on immigration.

Several weeks ago, a number of the country’s top economists called into question Prime Minister Justin Trudeau’s decision to significantly ramp up immigration – which includes a surge of temporary workers and international students – arguing that there wasn’t enough support in place to sustain it.

The economists, representing the Big Six banks at an Economic Club of Canada event, didn’t call for a shift towards restricting immigration. But they did have some strong opinions on the policy design and implementation around it, with TD Bank’s Chief Economist Beata Caranci bluntly saying “we screwed it up.”

Chad Larson, a senior portfolio manager at MLD Wealth Management with Canaccord Genuity, is taking a similarly critical stance.

“I’m in complete alignment with economists and other vocal components in the media that the Liberal government has made some critical errors with respect to immigration policy,” Larson told Wealth Professional.

Over 1 million new Canadians: too much of a good thing?

From the beginning of 2023 until October, Canada accepted more than 1 million new residents, including an estimated 455,000 new permanent residents and 800,000 non-permanent residents. That has pushed Canada’s population growth rate up to 3.2%, putting it ahead of other G7 countries as well as China and India.

Those numbers, Larson argues, paint a sobering picture of just how much the country’s ability to absorb new Canadians has been tested in the recent short term, with spillover effects showing up across various pockets of the economy.

“When you drink from a water fountain, you quench your thirst. When you drink from a firehose, there's unintended consequences of that,” Larson says. “You can have too much of a good thing, and I think the economy has proven that thus far.

“We could say that adding people to an economy bolsters GDP,” he says. “But is it profitable? And is it sustainable?”

While the influx of new residents has boosted GDP, it’s also led to a rise in consumer demand, which could impact the Bank of Canada’s (BOC) ability to wrestle inflation back down to 2%. That inflow also has implications on the housing front, where a chronic and complex supply-demand dilemma has strained affordability and pushed countless Canadian homeowners to the brink.

A note by TD Economics last year forecasted that from 2023 through 2025, Canada could fall short of demographically driven demand requirements for housing by about 215,000 units. But that projection, the bank said, assumes that population growth will moderate back from the aberrantly high rates seen following the expansion of non-permanent resident policies meant to accommodate pandemic disruptions.

“Should that not occur and Canada repeats last year’s cycle of record inflows, then the supply/demand gap for housing swells to over 500k units through 2025,” the note said.

Dark clouds, silver lining in housing

More recently, National Bank’s Chief Economist and Strategist Stéfane Marion, along with economist Alexandra Ducharme, raised similar concerns as they sounded the alarm on “a population trap” caused by extreme demographic growth.

“We're looking at our housing supply deficit hitting a record. … We’re accepting new Canadians with no place to put them,” Larson says. “Even if we move forward with housing policy and create more housing starts, that could create additional pressure in the construction sector as we don’t necessarily have the labour force needed to keep up with that.”

Last week, the federal government announced a temporary two-year cap on international student permit applications, which is expected to result in 360,000 approved study permits in 2024, down 35% from 2023. Whether that could help mitigate some of the cost pressures weighing on the Canadian economy is a question only time can answer.

While it’s hard to pinpoint which specific industries or investment sectors would be hit by the spike in immigration, Larson maintains that marginal Canadians and working-class families – a driving force of net investment flow into mutual funds, pension funds, and savings plans – would be hit hardest.

“With all these affordability challenges, you’re seeing more money not being saved, and less money being spent in the market,” he says. “The market is a wonderful merry-go-round driven by older people spending and young people saving. If you have a net withdrawal from the marketplace, it’s generally not overly positive for equity returns.”

The multifamily housing sector could potentially benefit from the immigration surge, Larson argues, as the influx of temporary residents and new Canadians creates greater immediate demand for affordable shelter.

“The question is at what point you could get a bubble in that space. But a bubble could only happen when people start to emigrate out of Canada,” he says. “I don’t think we’ll see a current swing away from the administration’s current policies, so the housing market should remain robust.”

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