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(Bloomberg) — Record-breaking immigration is muddying the economic picture for the Bank of Canada, distorting key statistics and making its battle against inflation more difficult.
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A wave of newcomers – largely due to an unforeseen increase in the number of foreign academics and transition staff – boosted Canada’s population expansion rate to 3. 2%, one of the fastest in the world.
The country welcomed more than 1. 2 million new citizens in one year, an influx that supported gross domestic product, supported customer demand, and raised housing costs, while reducing productivity and raising the unemployment rate. This creates a headache for policymakers and economists.
Population expansion makes it difficult for the central bank to assess how restrictive interest rates are, according to Stefane Marion, lead economist at the National Bank of Canada. The Bank of Canada raised its key interest rate to 5% in June and July, after the economy – i. e. , intake – showed unexpected strength.
“Are the last 50 to 75 foundation issuances justified when it’s all because of a population increase that nothing can be done about?” said Marion in an interview. I think the Bank of Canada has misunderstood the situation.
While source chain shocks from the pandemic were a forecast facing financial policymakers around the world, the Bank of Canada is the only primary central bank setting rates amid an accelerating population boom.
This is not an opportune time, adding a threat to the central bank’s already shattered credibility as policymakers ask how long they are worth keeping loan prices at the highest point in more than two decades.
“No one has calibrated models for this population flow thing,” Marion said.
Last year, the central bank spent a “considerable” amount of time at its April rate-resolution meetings discussing how the population flows and its interpretation of economic data. When the Bank of Canada raised its key interest rate in July, Governor Tiff Macklem described it as having a “more or less neutral” effect of immigration on value pressures.
But in a speech last month, Bank of Canada Deputy Governor Toni Gravelle said the population expansion has led to rising housing costs. Mortgage interest and rents were two of the main participants in 3. 4% inflation in December. Excluding housing, inflation is one percentage point lower. much closer to the bank’s 2% target.
In the long run, immigration will curb inflation, Gravelle said, adding 2 to 3 cents to the economy’s potential expansion.
“This makes it necessary to decode historically used economic signs,” Dominique Lapointe, an economist at Manulife Investment Management, said in an email. “This adds a unique point of complexity to financial policy decision-making. “
The country’s hard-working market is another example. A month of gains will now have to be seen in the context of the expansion of the workforce, which grew by 3% at the end of last year.
In 2019, the economy created an average of 22,000 new jobs per month and the unemployment rate remained stable. Last year, about 36,000 jobs were created per month and unemployment has risen.
While the expansion will slow in 2024, economists surveyed via Bloomberg say Canada’s unemployment rate is expected to reach 6. 7% by the end of this year. The 0. 9 percentage point increase would be the largest deterioration in the labor market situation among the Group of Seven countries, according to forecasts.
An increase in the unemployment rate of this magnitude coincides with periods of recession. But analysts say Canada will most likely create jobs in 2024; It is the strong expansion of the labor force that will raise the rate.
Marion is one of many economists who argue that the influx of people masks an underlying economic weakness. Adjusted for population, the Canadian economy has not grown since the second quarter of 2022, shortly after the Bank of Canada initiated its rate hikes.
GDP consistent with capita – an oft-cited measure of life – has returned to 2017 levels.
Increased demand has also weighed on home prices, protecting the real estate assets of millions of Canadians despite higher rates. This supports wealth and adds to evidence that an important financial channel for the central bank to counter price pressures has been silenced.
“The population expansion is distorting everything and it’s hard to get a sense of the fitness of the economy right now,” Randall Bartlett, senior director of Canadian economics at Desjardins, said by phone. “We still think we’re going to have a mild recession in the first part of the year. But if we look at it in capita terms, we’ve been in recession for quite some time.
Relying on more labor instead of capital investments also carries continued risks for Canada’s labor productivity, which has declined for six consecutive quarters and is a persistent source of criticism of Prime Minister Justin Trudeau’s government.
“Part of the challenge is that Canadian governments were prepared for the influx of people,” Benjamin Reitzes, macro and rates strategist at the Bank of Montreal, said in an email. “There hasn’t been enough investment in all types and grades of infrastructure, which has most likely decreased productivity overall. “
–With Randy Thanthong-Knight and Stephen Wicary.
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