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The U.S. has its fiscal stimulus. The Canadian economy? Well, it has its human stimulus.
The biggest population increase in six decades, driven by international migration, is one reason the Bank of Canada has been able to match the Federal Reserve hike-for-hike since June 2017 -- making the two easily the most hawkish central banks in the Group of Seven. In its latest increase Wednesday, the Ottawa-based central bank highlighted how the surge has bolstered consumption and housing activity.
“Labour income is being boosted by the larger population,” the Bank of Canada said in a report Wednesday that accompanied its decision to increase borrowing costs for a third time this year, keeping pace with the Fed’s three moves.
Under Prime Minister Justin Trudeau, Canada’s population has jumped by 1.4 per cent over the past year, double the U.S. pace, driven by a surge in non-permanent residents like students and higher immigration levels.
“We’ve called it the ‘human stimulus,’” Brett House, deputy chief economist at the Bank of Nova Scotia, said in a phone interview.
Not only does more people equal more demand in the short term, House said, but these highly-skilled human imports have the ability to boost potential growth going forward. As an added bonus, the pattern of where the new arrivals end up helps decrease the odds of a destabilizing bust in home prices in major metropolitan areas.
“Immigrants also tend to settle in the handful of largest cities, especially Toronto and Vancouver,” House said. “That mitigates the risk of a huge housing correction because of persistent demand coming in.”
All this is helping Canada’s economy keep up with a U.S. boom that’s being juiced by President Donald Trump’s tax cuts -- the two countries are the fastest growing in the G-7 -- and allowing their monetary policies to remain in sync. Indeed, traders anticipate this united tightening will continue, pricing in roughly the same number of hikes from each central bank in 2019.
Canada actually gets the benefit of both population growth and U.S. stimulus. Positive spillovers from the American fiscal boost and the near-completion of a new trade agreement help fortify the outlook for Canadian exports and business investment, House said.
Scotiabank expects the Bank of Canada will hike rates to 3 percent by the first quarter of 2020, at which point it will have narrowed the gap between its policy rate and the Federal Reserve’s to just 25 basis points.
Stefane Marion, chief economist at National Bank of Canada, said it’s not just the sheer number of people entering Canada, but also the quality of immigrants the country has been able to attract: younger, more educated people who help drive household formation and contribute to the economy’s resiliency.
“Of all the OECD economies, Canada has the most aggressive immigration policy that brings in work-ready immigrants,’’ he said. “We didn’t get fiscal stimulus on the same scale, but we’re still benefiting from the multiplier effect of the type of people we’re able to get from overseas.’’
To be sure, the larger population may be no panacea in the Bank of Canada’s quest to return rates to a neutral stance of between 2.5 per cent and 3.5 per cent. For example, there’s nothing they could do about an uncertain global growth backdrop that may force Governor Stephen Poloz to remain cautious. And new immigrants can’t relieve the existing debt burden of Canadian households, a factor that may be prove the single biggest reason for the northern central bank to lag behind the Fed.
“Canada is not at the same point in the credit cycle, tightening cycle, or housing cycle as the U.S., and the Bank of Canada isn’t going to be able to hike as much as the Fed,” said Frances Donald, head of macro strategy at Manulife Asset Management.
The acceleration of Canada’s population, though, will help to offset the impact of an aging workforce at a time when companies have been complaining about labour shortages.
“Since the financial crisis, we’ve seen fertility rates slide, but immigration has been skyrocketing and that’s driving population growth and growth in the labor force,” said Randall Bartlett, chief economist at the Institute of Fiscal Studies and Democracy. “It’s nice to see the Bank of Canada focusing on these structural factors that are growth-enhancing over the long term.”
--With assistance from Erik Hertzberg