Rapid population growth is challenging economists’ understanding of the economy as they monitor how businesses and consumers are responding to high interest rates.
The Canadian economy has outperformed expectations so far this year, avoiding the slowdown many forecasters were anticipating in response to the Bank of Canada’s aggressive rate hikes. The resilience of the Canadian economy prompted the central bank to raise interest rates again last week, saying that the risk of sticky inflation has risen.
But a closer look at the numbers shows high population growth is partly responsible for the strong economic results, potentially propping up the housing market at a time when high interest rates are supposed to suppress demand.
Here’s how population growth is affecting jobs, growth and the housing market:
The Canadian labour market made a remarkable recovery post-pandemic and continued to add jobs even as interest rates began climbing last year.
But much of the growth in employment can be attributed to immigration.
In 2022, Canada’s population grew by more than one million people, setting a new record as the country welcomed more immigrants. The influx of people in the country has increased the labour force, which grew by 200,000 last year. Employment also rose rapidly as the economy added 400,000 jobs.
BMO chief economist Douglas Porter said the strong population growth is making economists like himself reconsider what a normal monthly jobs report should look like. Before the pandemic, the Canadian economy would add 10,000 to 15,000 jobs in a typical month, he said.
“Now, it’s more like 25,000. That’s almost what we need in a month just to keep the unemployment rate from rising,” Porter said.
University of Waterloo economics professor Mikal Skuterud said headline figures — such as the number of jobs added — aren’t always the most useful for understanding how well the economy is doing for the average person, especially amid strong population growth.
“Employment levels are going to be increasing a lot, just because we’re adding a lot of people to the population. But I don’t think that tells us necessarily very much about the health of labour markets,” Skuterud said.
Higher population growth is also increasing the size of the economic “pie” as more people find jobs and spend money on goods and services.
During the first quarter of the year, real gross domestic product — which measures the size of the economy — grew at an annualized rate of 3.1 per cent.
Consumer spending was also up considerably, rising at a whopping 5.7 per cent annualized rate.
While population growth doesn’t account for all of the boost in economic activity, Porter said the rate of population growth should be somewhat taken into account when looking at growth figures.
“We should also be at least somewhat keeping in mind what the underlying growth rate of the population is before we get all excited about two per cent growth, and it’s the population is growing at two per cent. It’s really not impressive,” Porter said.
To gauge how well the economy is going for the average person, economists tend to prefer looking at real gross domestic product per capita. That figure remained flat between the last quarter of 2022 and the first quarter of 2023.
As the Bank of Canada looks to rebalance demand and supply in the economy, economists and the central bank are generally unsure what the net effect of higher immigration will be on inflation.
But Royce Mendes, managing director and head of macro strategy at Desjardins, argues that population growth is interfering with the Bank of Canada’s efforts by propping up demand in the housing market.
“(Higher immigration is) coming with a side-effect of blunting the impact of monetary policy in terms of its effect on the housing market,” Mendes said.
Activity in the housing market slowed down significantly last year as the Bank of Canada started raising interest rates. More recently, however, the housing market appears to have levelled off as demand surges again.
A recent analysis by BMO found that for every one per cent of population growth, housing prices typically increase by three per cent. The finding has implications both for housing affordability, and the Bank of Canada’s efforts to get inflation under control.
In an interview with The Canadian Press last week, Bank of Canada deputy governor Paul Beaudry conceded that higher immigration may be blunting the effect of higher interest rates on the housing market.
“We know that a big part of the housing market problem in Canada is the lack of sufficient supply,” said Beaudry. “So having a lot of people coming in, and … not managing to kind of build enough is certainly creating a lot of that problem.”