Canada’s rapid population growth over the past decade has been a key driver of economic expansion, with immigration playing a central role in boosting GDP, filling labor market gaps, and supporting housing demand. However, as the government moves to slow the pace of immigration, Canada is facing new challenges that could weigh heavily on its economy. With population growth expected to decline in 2025 and beyond, the country’s ability to sustain GDP growth and maintain a robust labor market is coming under scrutiny. This article explores how lower immigration will impact Canada’s economy and what it means for the country’s long-term growth prospects.
Population Growth: A Key Driver of Canada’s Economic Success
For years, Canada has relied on immigration to fuel its economic growth. Between 2016 and 2023, the country experienced a surge in population, adding more than three million new residents. This rapid population increase was primarily driven by high levels of non-permanent residents (NPRs), including international students, temporary workers, and refugees. These new arrivals contributed to both labor force growth and domestic demand, supporting GDP growth even as per-capita output remained weak.
In 2023, Canada’s population grew by 2.8%, the highest rate among G7 countries. This strong population growth helped mask some of the economy’s structural challenges, such as weak productivity and declining labor force participation, by adding more workers and consumers to the economy.
However, as the Canadian government plans to reduce immigration in the coming years, the country’s reliance on population growth to drive economic expansion is becoming increasingly unsustainable. The latest projections suggest that population growth will slow to 1.3% in 2025, down from 2.8% in 2023. This decline is largely due to a reduction in NPRs, as the government aims to lower their share of the population from 7% to 5% by 2027.
How Lower Immigration Will Affect GDP Growth
One of the most immediate impacts of slower population growth will be a decline in GDP growth. With fewer new residents entering the labor force, Canada’s economic output is expected to weaken. GDP growth is forecasted to slow to 1.4% in 2025, down from 2.4% in 2023. While this decline may seem modest, it represents a significant departure from the rapid growth Canada has enjoyed over the past decade.
The relationship between population growth and economic output is straightforward: more people in the workforce means higher levels of production and consumption. When population growth slows, the economy faces a reduction in both the supply of workers and the demand for goods and services. This creates a drag on GDP, particularly in sectors like housing, retail, and healthcare, which are highly dependent on population growth to drive demand.
Labor Market Impact: Fewer Workers, More Pressure
Another major consequence of lower immigration is the pressure it will place on Canada’s labor market. Immigration has been a critical source of labor force growth in recent years, helping to fill gaps in key sectors like construction, healthcare, and technology. With fewer immigrants entering the workforce, Canada’s labor force participation rate could decline further, exacerbating the challenges already posed by an aging population.
Canada’s dependency ratio—the number of dependents (those aged 0-14 and 65+) relative to the working-age population—is expected to rise significantly in the coming years as the baby boomer generation retires. A slower influx of immigrants will make it more difficult for the economy to replace these retirees, leading to labor shortages in critical sectors. This could drive up wages, increase costs for businesses, and reduce Canada’s overall productivity.
Sectors that have historically relied on temporary foreign workers—such as agriculture, hospitality, and manufacturing—are likely to be hit the hardest. Without a steady supply of workers, these industries may struggle to meet demand, further limiting economic growth. At the same time, businesses may face increased competition for workers, pushing up wage costs and leading to higher prices for consumers.
Housing Market: Slower Demand Growth
Canada’s housing market, which has been booming in recent years, will also be affected by lower immigration. The surge in NPRs and permanent residents over the past decade has been a key driver of housing demand, particularly in major urban centers like Toronto, Vancouver, and Montreal. As population growth slows, the demand for housing is expected to weaken, which could lead to softer home price appreciation and slower housing construction.
In 2024, the average home price in Canada rose by 2.5%, but with fewer new residents entering the housing market, price growth is expected to moderate in the coming years. According to economists, the slowdown in population growth will reduce demand for both rental properties and home purchases, particularly in cities that have seen the highest levels of immigration-driven demand.
For homebuilders and real estate developers, the outlook is less favorable. With slower population growth, housing starts are expected to decline, reducing construction activity and leading to job losses in the sector. This could have broader implications for the economy, as the housing sector accounts for a significant share of Canada’s GDP.
Productivity Concerns: Will Lower Immigration Hurt Innovation?
Another concern related to lower immigration is the potential impact on productivity and innovation. Immigrants have historically played a vital role in driving innovation and entrepreneurship in Canada. Many of the country’s most successful startups and high-growth companies have been founded or led by immigrants, particularly in the technology and healthcare sectors.
By reducing immigration, Canada risks losing out on the skills, ideas, and entrepreneurial spirit that immigrants bring to the economy. This could hamper Canada’s ability to compete in the global innovation race, particularly as other countries, like the U.S. and Germany, continue to attract top talent from around the world. A slower pace of immigration may also limit Canada’s capacity to address critical labor market shortages in high-demand sectors, such as engineering, software development, and biotechnology.
Moreover, as population growth slows, Canada’s already weak productivity performance is likely to worsen. According to the OECD, Canada ranks near the bottom of the G7 in terms of productivity growth, and without a steady influx of skilled immigrants, the country may struggle to improve its output per worker. This, in turn, will limit Canada’s ability to boost GDP per capita, a key metric of economic prosperity.
Government Policy Response: Can Fiscal Policy Make Up for Lower Immigration?
Given the economic risks posed by lower immigration, policymakers will need to consider how to offset the negative effects on GDP growth and the labor market. One potential solution is for the Canadian government to increase its investment in education and skills training to boost the productivity of the domestic workforce. By equipping more Canadians with the skills needed to fill high-demand jobs, the government could help mitigate the impact of slower population growth on the labor market.
Another potential response is to increase public investment in infrastructure and innovation, which could help spur economic growth even as population growth slows. By investing in new technologies, transportation systems, and digital infrastructure, Canada could improve its productivity and create new opportunities for businesses and workers.
Finally, the government could consider targeted immigration policies that focus on attracting highly skilled workers in critical sectors, such as healthcare, technology, and engineering. By prioritizing the immigration of skilled workers who can contribute to the country’s long-term economic success, Canada could continue to benefit from immigration’s positive effects while managing the overall pace of population growth.
Conclusion: Navigating Slower Population Growth and Its Economic Impact
As Canada reduces its reliance on immigration to drive population growth, the country will need to address the economic challenges that come with slower GDP growth, rising dependency ratios, and labor market shortages. While lower immigration may help address concerns about housing affordability and urban congestion, it will also create new pressures on the labor market, productivity, and innovation.
Policymakers will need to take a proactive approach to ensure that Canada can sustain long-term economic growth despite these challenges. By investing in education, skills training, and innovation, the government can help mitigate the effects of slower population growth and position the country for a more sustainable future.
