MONTREAL, Canada – Canada’s population is growing at a record pace, thanks mainly to higher levels of immigration and temporary resident arrivals. The population expanded by over 1.1 million people in 2022 and high growth is set to continue in the coming years.
This month’s economic letter looks at how Canada’s growing population is changing our economy and what it means for your business.
Despite a slight dip in the second quarter, Canadian economy has shown resilience in the face of rising interest rates and the waning of a post-pandemic spending wave. One of the factors behind this resilience is population growth.
Supply and demand are the fundamental factors driving the economy. A growing population contributes to both. On one hand, more people mean more demand for goods and services. On the other, a larger population adds workers, entrepreneurs and other supply elements to the economy.
Canada’s annual population growth reached 3.1 percent in the second quarter of 2023. Over the same period, real GDP grew by 1.1 percent. Therefore, Canada’s population is growing faster than the economy meaning that the standard-of-living performance is deteriorating.
A per capita analysis of real GDP actually shows that the Canadian economy is more vulnerable than aggregate figures suggest. We tend to favour an analysis of GDP per capita to assess a nation’s economic prosperity. Consumption continued to grow in the second quarter, but household spending per capita declined – a sign that consumers are becoming more cautious in the face of rising interest rates. Essentially, the Canadian economic pie is growing but the average size every Canadian is getting is shrinking. As BDC forecasts economic growth to be sluggish for the reminder of 2023 and 2024, coupled with an expected population growth of 1.4 percent , this will lead to continuing lower living standards for Canadians.
The job market
While an economic slowdown is finally underway in Canada after a series of interest rate hikes, job creation continues to be very strong. Over the last year, 500,000 new jobs were added.
The active population, meaning available and able-bodied workers, also grew strongly, adding 577,000. Since the pool of potential workers is growing faster than the number of jobs, Canada’s unemployment rate rose this year, although it remains low by historical standards.
While the growing population is helping ease labour shortages, many companies are still struggling to find the qualified workers they need. Why is this?
According to a Statistics Canada study, an imbalance between the skills of available workers and the needs of employers is a key contributor to persistent labour shortages in many parts of the country.
Therefore, your ability to successfully fill positions won’t necessarily be determined by a lack of workers applying for jobs or how you cope with pressure for higher wages. Rather, it will depend on your ability to train and transfer knowledge to your new hires.
The impact of skill shortages should not be underestimated. Research has shown that hard-hit companies are more likely to experience slower growth, be less competitive and suffer a deterioration in the quality of their products and services.
High population growth carries the risk of higher inflation as more consumers boost overall demand for goods and services. Thus, population growth could counteract the Bank of Canada’s efforts to temper demand and bring down inflation to its 2 percent target through interest rates hikes.
One market where this phenomenon is particularly evident is real estate. There are many housing challenges across the country, but the main issue remains a lack of supply.
Interest rate increases have slowed resale activity and housing starts. However, rental vacancy rates in major Canadian cities remain excessively low. CMHC believe that over 22 million housing units will be required by 2030 to help achieve housing affordability for everyone living in Canada. Since housing starts have not kept up with Canadian needs (so far at least), real estate price could pick up steam again and fast.
The imbalance between supply and demand could therefore widen further as the population grows, with repercussions not only for affordability, but also for the effectiveness of monetary policy in controlling inflation.
Population growth presents opportunities for small and medium-sized businesses. It offers a new pool of potential consumers and workers for entrepreneurs. But you need to act now to position your business to capitalize on current demographic trends and ensure long-term growth.