Canada’s economy looked like it was booming. Then slower immigration made it difficult to maintain that illusion. Economists at BMO Capital Markets challenged the narrative that population growth fuels economic growth. Looking at over 50 years of data, the bank warned investors there’s zero correlation between population and economic growth. The manufactured boom briefly provided a distraction from a weak economy, pairing it with a housing crisis that’s now in full correction mode.
Canada’s Population Boom Was Hiding A Weak Economy
Canada’s population growth went into hyperdrive on the narrative of a labour shortage. Cheap credit during the pandemic boosted demand, while rolling public health measures and flight from expensive cities disrupted the labour supply. Policymakers, in their infinite wisdom, added 3 million people over 3 years in response to this brief shortage. They argued the surge in people would help to tame inflationary labour shortages, and boost the economy’s growth.
Economists at BMO crunched the numbers, and found that’s not really the case. In fact, there’s virtually zero evidence to support that population growth is a leading indicator of near-term economic growth. “In the past 50 years, there is, in fact, zero correlation between year-over-year population growth and real GDP growth,” explains the bank.
In Q1 2026, the population was shrinking, but consumer spending came in at roughly 2% y/y. In 2023/24, Canada’s labour force grew at one of the fastest paces in decades, yet consumer spending during that period was roughly the same.
“The economy was arguably much weaker in 2023, when per capita GDP was dropping heavily, masked only by supercharged population growth,” says BMO.
Canada Is Running Out of Work, Not Workers
The Canadian job market wasn’t all that weak, but it certainly looked that way under the weight of bad policy. More immigrants mean more consumers, but only if they can actually make money to pay for things. The narrative of a labour shortage was accompanied by rising unemployment. The country was adding tens of thousands of jobs per month, but adding even more workers. BMO succinctly notes, “for the macro economy, we remain short of work, not workers.”
Population surges tend to occur at the start of economic booms, as relative prosperity plays a role. However, policymakers often put the cart before the horse. It’s kind of like seeing a globally influential city has expensive real estate, and determining the best way to make your city influential is to raise real estate prices. It’s a painful setback that gets no one anywhere.
The result has been a rough lesson for Canadians and immigrants aspiring to become Canadians. The bank suggests the surging unemployment partially fueled a reversal of immigration policy, forcing the current contraction. Canada’s non-permanent resident (NPR) target has been set at 5% of the population, down from the 7.6% peak in 2024. The outflow of NPRs topped 460k people in the past year, with the population boom now turning into a bust.
“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,” explains BMO.
Canada didn’t solve a labour shortage. It tried to use people as economic stimulus, then reversed its policies in a panic when it failed to conceal the issues it was hoping to patch over.
Canada’s Rental Market Gets A Reverse Demand Shock
Nature’s already healing with the changes in policy, but not before it leaves a scar. BMO notes that a supply overhang of 180k rental units is about to meet slowing population growth. It’s already pushed rent inflation down to 3.5% y/y in May, a sharp swing from 9.0% growth in 2024. Condo presales are slowing as investors who crowd end users out of the market pull back.
It’s an unusual dynamic where “rental units under construction now outnumber combined condo and homeownership units for the first time,” says BMO. They see rents falling further, contributing to deflationary pressures, and helping with affordability.
“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,” says BMO.
