One of Canada’s significant challenges is its rapidly growing population, largely driven by increased immigration. Between the first quarter of 2015, when the Express Entry program was launched, and the third quarter of 2024, the population grew from 35,571,043 to 41,288,599. While this growth has bolstered overall economic expansion, it has also resulted in a decline in GDP per capita. Immigration is a crucial component of economic growth, and no developed economy shies away from welcoming skilled immigrants. However, in Canada’s case, the number of immigrants is outpacing the capacity of existing infrastructure to support them. Although Canada has ample land to geographically accommodate the influx of immigrants, its infrastructure is not uniformly developed across its vast expanse. Additionally, the country’s immigration plan appears to be shifting from focusing solely on skilled immigrants to including more semi-skilled workers, leading to an influx of labor across various skill levels. Recently, the government updated the Temporary Foreign Worker Program (TFWP) and the International Mobility Program (IMP) to prevent the exploitation of immigrant workers who may be vulnerable to abuse. The government has also placed caps on the number of temporary residents and students to manage challenges linked to high immigration levels. The benefits of immigration are clear, as evidenced by Canada’s relatively favorable median age compared to other G7 countries like Japan, Italy, France, and Germany. A younger population has positive implications for potential output growth, aligning with the government’s perspective on the perks of immigration. The critical question is: what is the ideal immigration target that Canada currently needs? According to the 2023-2025 Plan, Canada aims to welcome 485,000 new permanent residents in 2024, 500,000 in 2025, and maintain that level in 2026. These targets are considerable, especially given that 471,550 new permanent residents entered Canada in 2023, exceeding the target of 465,000. Whether Canada requires this scale of permanent resident population is open for debate. If the government adheres to these targets, there must be corresponding infrastructure growth to support the population. In this context, immigration remains both an opportunity and a potential risk for the Canadian economy.
Canada’s housing infrastructure is among the most expensive globally, driven by several factors. These include high demand from population growth and immigration, restrictive zoning laws, and lengthy approval processes that have led to significant supply shortages, especially in urban centers. Additionally, speculative investments by foreign buyers, rising construction costs, and the increasing role of large corporations and investment funds in the housing market have exacerbated the issue. The impacts of inflated housing prices are clear. With home prices rising faster than wages, homeownership is increasingly out of reach for middle-income families, particularly in cities like Toronto, Vancouver, and Montreal. This lack of affordability has widened the generational wealth gap, benefiting existing homeowners while locking others out of the market. Moreover, labor mobility has been affected, as high housing costs deter workers from relocating to areas with better job opportunities. Household debt has also surged as Canadians take on larger mortgages, leaving them vulnerable to interest rate increases or economic downturns. As housing costs consume more income, disposable income for other necessities decreases, which can reduce overall consumer spending and hinder economic growth. The International Monetary Fund (IMF) quantified Canada’s housing shortage at 4 million units as of July 2024. The 2024 federal budget sets a goal of building 3.9 million new homes by 2031, which could largely close the gap and bring housing affordability back to early 2000s levels, according to the Canadian Mortgage and Housing Corporation (CMHC). To address housing demand pressures, the government has introduced several measures, including a two-year ban on foreign buyers, vacant home taxes in some provinces, rent control to limit annual rent increases, and an anti-flipping tax targeting short-term property sales. However, these measures have primarily focused on reducing demand rather than addressing the need for increased housing supply. As immigration levels continue to rise, housing affordability will likely remain a significant challenge for Canada’s economy.
Labour market mismatch and weak productivity growth also present significant structural challenges in Canada, closely linked to rising immigration numbers. Many immigrants and graduates struggle to find jobs that match their qualifications, while industries face skilled labor shortages as new immigrants prefer white-collar jobs over blue-collar ones, which are more abundant. Additionally, weak labor productivity is evident in the difficulty of fully integrating immigrants into the labor market. Contributing factors include strong wage bargaining by workers’ unions, discouraging employers from investing further in their workforce. Moreover, Canada’s investment in ICT, R&D, and education lags its G7 peers, exacerbating weak labor productivity. The mismatch in the labor market forces new immigrants to accept jobs below their qualifications, further driving weak productivity. The IMF noted government measures to address this issue, such as modernizing the Competition Act in December 2023, introducing investment tax credits for green sectors in the 2023 federal budget, and the accelerated capital cost allowance in the 2024 budget to boost investment in cutting-edge technologies. We believe that eliminating barriers to interprovincial labor mobility, increasing corporate investment, balancing wage negotiation laws to avoid excessive union influence, and adopting artificial intelligence are additional steps to improve overall productivity.
There are several other structural concerns in the Canadian economy that warrant attention. The rising cost of living is increasingly deterring skilled workers from moving to Canada and even prompting some to leave for other countries. Additionally, Canada’s anti-money laundering framework, while in place—such as the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and oversight by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)—is often considered less stringent compared to the U.S., leading to a shift in illicit financial activities towards Canada. A notable example is the recent money laundering case involving TD Bank, which resulted in a guilty plea in the U.S. If Canada’s anti-money laundering laws were as robust as those in the U.S., the pressure on housing markets in major Canadian cities might ease. Another pressing issue is the strain on the healthcare system. Long wait times for procedures, overburdened hospitals, and inadequate mental health services are critical concerns. The aging population further exacerbates this, with growing demand outpacing the supply of healthcare services, worsened by a shortage of medical professionals. Canada’s medical industry has strict entry requirements, which force foreign-trained doctors to undergo extensive re-training, examinations, and professional licensing before they can practice. Meanwhile, the lack of sufficient telemedicine infrastructure limits the ability to address healthcare gaps in a timely manner. Furthermore, challenges in integrating immigrants into the labor market and society prevent them from fully contributing to the economy. Addressing these challenges would position Canada on a stronger economic footing.
Written by Michael Ogunremi
