How population growth impacts the Canadian economy — and you

Generally speaking, a growing population promotes economic growth. A positive growth outlook is good for corporate earnings, and good corporate earnings are good for equity performance and, by extension, your equity portfolio.

A growing population can also help alleviate inflationary pressures. As newcomers integrate into the workforce, they add supply to a tight labour market and slow the rate of wage increases. And indeed, in 2023 the labour force grew by 621,000 individuals, 463,000 of which were work permit holders. This increase in the labour force resulted in an increase in the unemployment rate which went from 5.1% in March 2023 to 6.1% in March 2024.

However, in spite of this, increase in unemployment wages have yet to lose momentum. Average hourly wages have been growing at or above 5% since December 2023, and most wage growth measures are accelerating in Q1 2024.

A plausible reason why the positive supply shock from population growth has yet to put a brake on wage inflation may be that newcomers are also consumers. In 2023, for each addition to the workforce there was approximately two additional consumers. Given the poor performance of labour productivity in the past several quarters, more demand for goods and services could be providing a further boost to labour demand. This makes it difficult for wage inflation to slow down, which could delay interest rate cuts by the Bank of Canada.

The hasty growth in population has also aggravated pressures on the Canadian housing market, where there was already an imbalance in supply and demand. If you’re a buyer, this means purchasing a home that may be overvalued. If you’re a renter, it means paying more for a residence that’s harder to find. The rental market is currently posting the lowest vacancy rate in the last 22 years and rent inflation has almost doubled since mid-2022 to 8.5% in March 2024, the highest rate observed since 1983.

In the long term, population growth is positive. It increases potential economic growth and can reshape the demography and have a positive impact on the fiscal balance. But in the short term, it could mean higher-for-longer interest rates and continued housing market challenges.