Canada’s Economy Looks Like A Recession When Adjusted For Population: BMO  

Canada’s population continues to grow at one of the fastest rates ever. It’s economy? Not so lucky. BMO Capital Markets warns the country’s economy resembles a recession, once population-adjusted. Growth is supposed to be easy with a population boom, but this one has become inflationary. That makes it complicated for the central bank, now balancing elevated inflation with a slowing economy. 

Canada’s Population Is Booming, Adding 1.2 Million People In A Year

Canada’s population continues to surge as record inflows are used as stimulus. The latest estimates show annual growth hitting 3.0% (+1.2 million people) as of July 1st. It was the largest growth on record in terms of people, and tied for the fastest rate since the post-WWII boom. No other advanced economy has pursued growth so aggressively—and found it.  

At a high level, population growth generally helps to boost the economy. More people means more consumption. That means more work to pay for that consumption. It’s an easy recipe for growth, but it’s not foolproof, as recent data reveals. 

“It’s very hard to bring down an economy in the aggregate when the size of the population is growing this quickly,” says Robert Kavcic, a senior economist at BMO. “But at the individual or household level, things appear to be getting tougher.” 

Canada’s GDP Is Stagnant, Even With Record Population Growth

One would expect aggressive growth with Canada’s setup, according to BMO. A booming population is facing an unemployment rate just above record lows. Job vacancies are at 3.9%, higher than pre-pandemic levels. Wage growth also remains robust, despite the sudden influx of new labor competition. 

Even these tailwinds can’t provide enough lift to get Canada’s GDP growth off the ground. Statistics Canada (Stat Can) reported real GDP was flat in July, and increased just 0.1% in August. BMO emphasizes that over the past six months, GDP growth hasn’t budged. No growth is already bad, but adjusting for population reveals things are much worse.  

Canada’s GDP Growth Resembles A Recession When Adjusted For Population

Adjusting for population growth, Canada’s real GDP is contracting at an alarming rate. “In per capita terms, Canada’s real GDP is now on track to be down more than 2% y/y in Q3, a magnitude of decline typically only seen during recession—the difference this time is that it’s the denominator that is surging,” says Kavcic.

To be blunt, the population is growing much faster than the economy. A record population boom is driving new demand, but it’s barely replacing lost demand. The new demand is just obfuscating household pain.

BMO sees the long-term benefits of immigration as good news for Canada. High-demand, skilled labor will help with the Baby Boomer retirement wave. That should help ease wage growth, and fill the skills gap. However, negative consequences will be amplified by the rate pursued.

“Clearly there are longer-term demographic benefits from robust immigration, especially if those flows are concentrated in much-needed skilled areas of the job market. But the rate of flow matters given that the supply of housing, health care services and other necessary infrastructure can’t possibly respond fast enough to the current pace.” 

More than half the growth was non-permanent residents, many on study permits. This helps play a bigger role on the demand side of the equation than adding to supply. Eventually it will add to the supply, but it will do so as quickly as it came. In other words, the short-term impact is inflationary, with a long-term disinflationary impact. Both of which are not great, since stable growth is the goal of any country’s national currency.

Speaking of currency, BMO sees this combination of factors being bad news for the Bank of Canada (BoC). The central bank is trying to tackle inflation driven by excess demand, including population growth. Inflation is a serious problem, eroding real GDP growth and applying household pressure. At the same time, they also have to deal with a slowing economy. It’s a combination of factors that produces no winners, regardless of the BoC decision.