If Canada sticks to its newly reduced immigration targets, GDP growth will probably further suffer, likely continuing a decline in per capita incomes.Sean Kilpatrick/The Canadian Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
It’s now widely accepted that Canada has an immigration problem. What’s less well-known, perhaps, is that this problem is far from peculiar to Canada. It’s facing governments across the developed world. And, as other countries that are trying to similarly reduce their immigrant arrivals are finding, the problem is proving more difficult to solve than they’d imagined.
After a sharp fall during the COVID-19 lockdowns, Canada’s net migration figures more than doubled in 2022, and stayed high for the next two years. So did the U.S.’s and Germany’s. Britain’s tripled. Even famously immigration-resistant Japan saw immigration soar fourfold. And while the strain of Canada’s immigration surge was admittedly worsened by the fact the country had already been importing numbers far above historical trends in the previous few years, that’s also broadly true of our major partners. Most Western countries have been raising their immigration numbers substantially since the turn of the millennium.
It went without saying that so many new arrivals put strains on the housing stock, employment markets and social services of recipient countries, all of which has given rise to cultural and social tensions and a resurgence of anti-immigrant politics. In Canada, although the economy kept growing, per capita incomes began falling because the population was growing faster than GDP.
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But it was because of immigration that the economy kept growing. It would therefore be a mistake to assume that reducing immigration will lead to any improvement in per capita incomes. Developed countries which have historically kept immigration within narrow bounds, such as Japan and Italy, have seen their per capita incomes decline even more than Canada’s over the past couple of decades (whose decline began only recently).
In fact, those two decades are key to understanding what’s going on here. 2008 was the year of the Global Financial Crisis, and since then the growth rate of nearly all Western economies has slowed to a crawl. The exception has been the U.S., but a large asterisk must be placed next to that case because virtually all the U.S.’s growth since then has been bought with debt. Take the massive national debt and deficit out of the picture, and the U.S. economy might not have grown at all.
Driving the slowing growth rate of GDP has been the declining labour force, as the baby boomers retire, coupled with the weakening growth of labour productivity. Although Canada has been among the worst performers in labour productivity in recent years, virtually all Western countries are going through a similar slowdown. That means to keep the economy growing at the same rate, you need to gradually ramp up the labour supply, and you have to do it a lot: even the surge of the past few years in Canada was barely sufficient to keep the labour force from contracting.
So, if Canada sticks to its newly reduced immigration targets, GDP growth will probably suffer further, quite likely continuing the decline in per capita incomes. Having said that, some people may experience an improvement in their living standards. Given the slowing growth in the labour supply, the bargaining power of workers may improve. So, while it’s a tough job market for new graduates just now, the medium-term prospects for young people entering the work force may improve.
But rising wages amid slowing growth means someone else will pay the price. In this case, rising labour costs may eat into corporate profits, ultimately knocking asset values. In the short term, governments and central banks have repeatedly protected asset values with bailouts and cheap money. But the kind of everything-everywhere-all-at-once bubble that has resulted, with virtually all asset classes rising across all markets – nearly all the world’s stock markets have risen this year, some spectacularly so – will eventually feed into inflation.
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And if inflation begins to rise at a time workers can bargain for better wages, they will just ratchet up labour costs, further fuelling the inflation. Sooner or later, governments and central banks will be forced to return to a tight-money regime, as happened at the end of the last high-inflation period in the late 1970s. That’s when mortgage rates hit double digits. And asset prices plunged.
So, falling incomes are pretty much baked into Canada’s future at the moment. There are really only two ways out of it: either immigration goes up, or we experience a productivity revolution. An awful lot of money is riding on AI coming to the economy’s rescue but if the technology fails to raise worker output as much as hoped, asset owners will suffer. That will include the pension funds supporting that growing pool of retirees.
These are not easy choices, but there’s no avoiding them. Canada may soon find that while it can’t live with such immigration numbers, it can’t live without them either.