How newcomers impact the Canadian economy

A rise in newcomer arrivals has boosted Canada’s population growth in recent years, adding to both supply and demand. Assessing how this change impacts the economy can provide insight into inflationary pressures.

Canada’s total population has grown by 2.3 million (or 6%) over the past two years, with almost all this due to the arrival of newcomers (Chart 21).1 The increased number of newcomers affects the economy through three main channels: labour markets, consumption and housing.

Labour markets

Adding newcomers to Canada’s labour supply has significantly boosted the economy’s potential for non-inflationary growth. For example, between the third quarter of 2022 and the first quarter of 2024, newcomer arrivals are estimated to have added 2½% to the level of potential output.

Many newcomers, however, face significant challenges integrating into the Canadian labour market.2 In particular, the softening of the labour market has made it even harder for newcomers to find a job and be attached to the labour force (Chart 22).

Difficulty getting foreign credentials and experience recognized in Canada also often results in newcomers taking jobs where their skills do not match those that are required for the position. This potential mismatch also weighs on productivity.

As a result, the boost to labour supply due to the arrival of newcomers could be initially somewhat lower than what would be expected given the increase in the working-age population.3

Consumption

While it may take some time for newcomers to add to aggregate supply, their impact on demand starts right away. Upon arrival, immigrants expect to spend substantially more than non-immigrants. Many newcomers bring substantial savings to set up households. This initial boost to demand can take place well before many newcomers have found employment.

Overall, the consumption and employment profiles of newcomers suggest that they contribute slightly more to demand than to supply in the first few years after they arrive in Canada.

Housing

Strong population growth in recent years has boosted demand for housing. This is adding to existing pressures on house prices and rents.

The increase in housing demand from newcomers is being felt across all types of housing, but the largest initial impact tends to be in rental markets. This is because most newcomers start out as renters. Survey results indicate that immigrants are less likely to report owning a home until about 10 years after arriving in Canada (Chart 23).

Growth in housing supply has not kept up with the strong increase in demand, with construction activity remaining close to pre-pandemic levels. Long-standing structural challenges to faster growth in supply include:

• municipal zoning restrictions
• high development fees
• time-consuming and expensive permitting processes
• shortages of skilled construction workers

In the current environment, developers have also reported additional challenges due to high funding and construction costs.

Summary

The effects on overall supply and demand from increased population growth are expected to largely offset each other over the medium term. However, because newcomers affect demand sooner than supply, this unevenness contributes to inflationary pressures in some sectors. In particular, there are additional upward pressures on house prices and rents.

Endnotes