Trudeau failed immigration wave, top Canadian banking economists say

(Bloomberg) — Canada’s current immigration policies — among the most overt in the world — are now causing economic damage and need to be reconsidered, the country’s top economists say.

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Prime Minister Justin Trudeau’s decision to dramatically increase immigration — and admit a flood of temporary workers and international students — without providing the right support has created a litany of economic problems, including higher inflation and weak productivity, chief economists at Canada’s largest banks during an extensive panel discussion in Toronto on Thursday.

“Honestly, I’m surprised we messed up because we’re in such a privileged position in Canada,” Beata Caranci, chief economist at Toronto Dominion Bank, told a packed audience at an Economic Club of Canada event.

Unlike many other countries, including the U.S., Canada has not faced poorly controlled flows of migrants across its land borders and has had time to consider the implications of its policies, Caranci said. “We designed our own policy, we put it in place, we implemented it and we still screwed it up.”

Canada accepted about 455,000 new permanent residents in the year to Oct. 1, while more than 800,000 non-permanent residents arrived, a category that also includes temporary workers, foreign students and refugees. With a population growth rate of 3.2%, it is growing faster than any Group of Seven country, China or India.

While there are annual targets for permanent residents, there is no limit on permits for international students and the government has made it easier for employers to hire temporary foreign workers.

‘Population trap’

“I’ll put it bluntly: we’ve fallen into the population trap,” said Stéfane Marion, chief economist at the National Bank of Canada. An increase in living standards is no longer possible because “you don’t have enough savings to stabilize your capital-labor ratio.”

Faced with a backlash over housing costs, Trudeau has recognized the need for change. His immigration secretary, Marc Miller, has pledged to make it harder for colleges to boost foreign enrollment without providing adequate housing or services. Still, the government is under pressure to keep immigration levels high as older workers retire and the fertility rate falls.

While the federal government is gradually trying to encourage rental housing construction, “the numbers just don’t add up,” said Avery Shenfeld, chief economist at CIBC Capital Markets. “I’m a bit surprised that the government is moving quite slowly in this area. I think there is some urgency to better balance these numbers of students and temporary workers with the arithmetic of our housing strategy, because the two work at cross-purposes.”

The problem is exacerbated in provinces that have limited funding to post-secondary institutions, forcing schools to make up for lost revenue with international students, Shenfeld said. The result is community colleges with “branches” full of international students in Toronto office buildings, he said. “It’s basically just a tuition machine.”

None of the economists suggested that Canada should move to a restrictive immigration policy, but that it should be more conscious about matching the influx of people to what the country can handle.

Canada has tended to rely on immigration to quell complaints from companies about their hiring difficulties, several economists said. While that’s understandable, “in some ways we’ve made it too easy for companies to hire people,” said Jean-Francois Perrault, chief economist at the Bank of Nova Scotia. He pointed to the US, which has much stricter immigration policies and higher productivity. “Immigration policies made it cheaper to bring people in rather than invest.”

Disastrously weak productivity and housing affordability are the biggest challenges facing the Canadian economy, says Douglas Porter, chief economist at the Bank of Montreal, and strong population growth is clearly a factor in both.

There are of course other factors that play a role. A lack of innovation and business investment has negatively impacted Canadian productivity for decades, says Craig Wright, chief economist at the Royal Bank of Canada. He said rising rents are not just caused by immigration pressure; high housing prices and interest rates are driving permanent residents from their own homes to rental properties.

From a report by Desjardins Securities Inc. this week showed that if Canada were to close its doors to temporary residents now, real gross domestic product would fall and the recession would last twice as long.

That puts the Bank of Canada in a difficult position and explains why it will have to cut rates in 2024, Caranci said, even as housing costs still push inflation above the 2% target. She expects the central bank to shift its messaging – reminding markets that inflation is a cross-border issue and that they are not solely responsible for inflation.

“If they don’t do that, you’re definitely going to be in a recession scenario and possibly even a hard recession scenario,” she said.

–With help from Erik Hertzberg and Laura Dhillon Kane.

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