Recent revisions to Canada’s population estimates by Statistics Canada have significantly altered the economic outlook. Initially thought to be shrinking by 0.5 percent, the population actually grew by that amount due to improved counting of non-permanent residents. This adjustment reveals that much of the recent economic growth was driven by population increases rather than productivity gains. With the revision, year-over-year growth in GDP per capita for the second quarter is now estimated at less than 1 percent, half of the previously reported 2 percent.
The Canadian economy is already showing signs of slowing down. Flat GDP in July and a modest 0.2-percent increase in August suggest a roughly 2-percent annualized growth pace for the third quarter, down from 3.3 percent in the second quarter. The upward adjustment in population estimates also indicates more slack in the labor market, with the vacancy-to-unemployed ratio dropping to about 0.33. This implies there is more room for wage growth to decline, which is already at its lowest since 2017, outside of the pandemic.
The economic slowdown is further exacerbated by U.S. tariffs, expected to push annualized growth in the fourth quarter below 1 percent. Inflation-adjusted wage growth is already negative, and the slowdown in population growth is anticipated to accelerate. Ottawa’s plan to reduce the share of non-permanent residents to below 5 percent by the end of 2027 adds another layer of complexity, as tighter immigration measures could further strain the economy.
For the Bank of Canada, rushing into a quarter-percentage-point hike at its Oct. 28 meeting could be premature. The labor market is not tight enough for the current energy price shock to spread through to wages. Raising interest rates ahead of an economic slowdown could be a major mistake. Additionally, allowing the Canadian dollar to weaken might provide a competitive advantage to address chronically weak productivity.