Size of Ottawa’s cuts to immigration targets takes business by surprise

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Businesses and economists were taken by surprise when Justin Trudeau’s government significantly reduced Canada’s annual immigration targets on Thursday.

A reduction was on the cards, but not many expected a reduction of about 21 per cent to 395,000 newcomers in 2025 and 380,000 in 2026. The target for 2024 was about 485,000.

The targets have generally been maintained or increased for more than a decade, but the federal government decided to go against the trend due to declining job vacancies, rising unemployment — especially among newcomers and younger people — and growing concerns about affordability.

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“We were not expecting such a significant decrease,” said Diana Palmerin-Velasco, a senior director at the Canadian Chamber of Commerce, which represents more than 200,000 businesses. “I have been hearing from employers who are also surprised and shocked. It’s not clear what is really the evidence for taking these decisions.”

Immigration plays a key role in the country’s economy, with newcomers accounting for more than one-third of the workforce in industries such as accommodation and food services, transportation and warehousing, and the professional, scientific and technical sectors, according to Statistics Canada. The country’s aging population is another reason why there’s a high reliance on immigrants.

The government’s Immigration Levels Plan annually maps out the number of permanent residents it wants to bring in for the next three years. For example, Canada in 2022 said it wanted to bring in 465,000 permanent residents in 2023, 485,000 in 2024 and 500,000 in 2025. Last year, the target plateaued at 500,000 for 2026.

The reduction this year reflects the changing economy, Trudeau said at a press conference on Thursday. Previously, Canada closed its borders during the pandemic, but then had significant labour shortages afterward, so the number of people coming into the country was increased.

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But now, “our economy is in a different place,” he said. “We need to let our communities, infrastructures, catch up to the population. That’s why we’re pausing population growth by reducing immigration numbers for the next two years, so we can get back pragmatically to a place where Canada can once again grow.”

Canada regularly announces its targets for permanent residents, but this is the first time they have included the number of temporary residents — international students and workers — that the country wants to bring in.

Currently there are about three million temporary residents in the country, or about seven per cent of the total population. Ottawa wants to bring that down to five per cent by 2026. In order to do so, the temporary resident population is expected to decline by 445,901 in 2025 and 445,662 in 2026, the government said.

Headed for overcorrection?

Bank of Nova Scotia economist Rebekah Young, who had previously estimated in a report that the government needed to cut about 500,000 temporary residents in each of the next two years to meet its five per cent target, said she was surprised that the government was actually trying to do exactly that.

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“The point of my report or exercise earlier was saying that if they stick to their target, this would be going too far,” she said. “They look like they are on a path to overcorrecting.”

Young said the government needs to provide more details on how it intends to cut a million temporary residents in the next two years, “given how aggressive this plan will be and the impacts it could have on the economy.”

Velasco said the government’s attempt to cut about half a million people per year — 105,000 permanent residents and about 450,000 temporary residents — was an overreaction.

“This means that there will be half-a-million less people available for work,” she said. “That is really significant. Lots of concerns for businesses. It seems to be more of a political move, honestly.”

As a result of the reductions, Canada’s yearly population growth is expected to decline by 0.2 per cent in 2025 and 2026 before returning to a growth rate of 0.8 per cent in 2027. During the past two years, the population increased by at least two million people, or about three per cent, each year.

The cuts could also impact consumer spending and slow the economic growth rate, economists say, but they could also encourage businesses to invest more and boost productivity.

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Since the reduction is likely to take place when the economy is becoming less inflationary and interest rates decline, this could inspire “existing Canadians to ramp up their spending,” said James Orlando, director of economics at Toronto-Dominion Bank, instead of depending upon newcomers.

Bank of Montreal economist Robert Kavcic in a note on Thursday said that while the government’s decision will reduce demand, the narrative that slower population growth is bad for the economy needs to be dispelled.

He said gross domestic product per capita, which measures the total production of goods and services during a certain period divided by the total population, has fallen in seven of the eight quarters since the second quarter of 2022.

In terms of housing, Canada will need to build 670,000 fewer units due to the reduction, Immigration Minister Marc Miller said at the press conference.

Orlando said this won’t greatly improve housing affordability, but could further slow the growth rate in prices.

“The hope is, with all the incentives around now with purpose-built rentals, the number of houses and condos built in the country, maybe it could be a bit more attainable,” he said.

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Kavcic expects the policy change to be “felt quickly” as far as the housing sector is concerned.

“This move will dampen price pressures and rent,” he said in a note to clients on Thursday.

Kavcic also expects the reduction to take some “slack out of the job market,” where new immigrants and youngsters are finding it tough.

“While there are still pockets of skilled labour shortages within the Canadian economy (for example, trades and health care), temporary resident inflows are not adding much to that labour supply — in fact, they are creating more demand,” he said.

Orlando said the reductions provide some hope of improvement as far as the rising unemployment rate is concerned.

“It doesn’t mean that it’s going to drop the unemployment rate,” he said. “This is a story of gradual improvement.”

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