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This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Katherine Judge: Welcome to the Eyes on the Economy podcast. I&#8217;m Katherine Judge, an economist at CIBC, and today I&#8217;m speaking with Ali Jaffrey, also an economist at CIBC, about a recent paper that he published on student immigration in Canada and its impact on the economy. Welcome, Ali.
Ali Jaffery: Thanks, Katherine.
Katherine Judge: So can you start by giving us some context around the student immigration situation and these swings we&#8217;ve had over the past few years?
Ali Jaffery: Absolutely. So immigration in Canada, particularly student immigration has been a very hot topic. We&#8217;ve seen the rise in non-permanent resident immigration in the post pandemic period, which I&#8217;m defining here as 2022 to 2024. And so just to give some, you know, that broad context, if we rewind from 2000 to 2015, average net international migration to Canada was around 200,000 and population growth was about 1% on average over that period. And then in 20&#8230;we&#8217;ve had a shift in regime since 2015. From 2015 to about 2019, the rate of net international migration to Canada doubled, you know, rose to over 400,000 on average over that period and actually reached half a million by 2019. And then that regime got supercharged in the post pandemic period from 2022 to 2024, we had about a million people per year arrive. And there&#8217;s been a shift in the composition of immigration over these regimes. That, you know, 2000 to 2015 period was mostly permanent residents. And then we started to allow more non-permanent residents come in 2015 to 2019. And then the majority, around 60 % of the recent wave of immigration has been&#8230;
these non-permanent residents. And the non-permanent residents were arrived initially mostly as students and then transitioned into work through a series of very lax rules where some firms or employers were able to access these workers without more rigorous labour market assessments that are attached to other types of permanent. So the system in effect became very loose.
And there was very poor oversight over the numbers of people who arrived, many of the students. So we&#8217;ve seen a total shift in immigration over these three regimes. And obviously the government had to pull a major U-turn on this policy very wisely, I think. Late last year where they decided to significantly reduce immigration flows and essentially target flat population growth.
The latest levels plan has a target of reducing the share of non-permanent residents as a share of the population from around 7 % to 5 % by the end of next year.
Katherine Judge: So the period where we saw a very strong immigration, that also coincided with very weak GDP per capita growth in Canada, which you highlight in the paper, but you argue that that can&#8217;t fully be attributed to this increase in immigration. So can you talk a little about that?
Ali Jaffery: Yeah, absolutely. You know, undoubtedly a surge in population growth around 2.5-3% that we&#8217;ve had over this period is not good for per capita income. But it&#8217;s not the only reason. I think the numerator was also bad. And people don&#8217;t really remember, but over this period, 2022 to 2024, a lot of other things happened. So obviously there was a post pandemic hangover. We had a surge in pent up demand, particularly for housing.
In 2021 as we had vaccine availability, people going back to work, we have shifts and work from home. And so that all kind of peaked in 2021. And so then demand had of naturally began to slow in the year after and the years after. But also the second force, probably the biggest force, in my opinion, is the rapid tightening of monetary policy, which was largely in response to globally induced inflation. Also, there was strong domestic demand that partly it responded to as well. That weighed on interest sensitive demand in the economy. And then the last force was, you know, the weakening of commodity prices after the beginning of the Russia-Ukraine war. All of these things kind of happened at the same time. Most of these shocks began in 2022 before we saw the peak population growth which occurred in 2023 2024 so all of those forces conspire to weaken GDP as well the numerator in that equation so we should be careful not to attribute all of the weakness and per capita income due just to the rise in population although I know many people will argue that well the rise in population also disincentivized firms from investing in and kind of labor-saving capital and well I think that&#8217;s generally true over the long long haul if you have sustained high immigration flows like we&#8217;ve had. I think over this period our models tell us that that wasn&#8217;t a big force. Interest rates, commodity prices really explain the bulk of the decline or the weakness rather in investment. And also anecdotal reports from the Bank of Canada&#8217;s Business Outlook Survey, they back that up.
Katherine Judge: So what about the impact on prices? Obviously, there&#8217;s higher rent when more people come and the housing supply doesn&#8217;t increase in line with that. But you also highlight the fact that there&#8217;s downwards pressure on other prices because of the labor shortage being alleviated in some industries by NPR. So how does that all balance out essentially?
Ali Jaffery: Yeah, so that&#8217;s a great question. So there&#8217;s a mix of things that happened. Unambiguously, the rise in student immigration contributed, at least in material part, to higher rental inflation. There&#8217;s a chart in our paper that shows almost a very concurrent rise in rental inflation as population growth increased. But I think it&#8217;s a bit more complicated even there, because you see other advanced economies see very high increases in rent inflation over similar periods, but less population growth. But nonetheless, it&#8217;s obviously clear that the increase in population contributed to that, but housing supply challenges are also a part of that. But there&#8217;s another part of the contribution of NPRs and students to the inflation story through their labor supply increase. So we observe, you know, significant contribution to the net employment rate, that&#8217;s the combination of the unemployment rate and the participation rate. And they&#8217;ve added around, you know, percentage point and a half over the past two years, offsetting, you know, aggregate weakness in the overall net employment rate, which is down around, you know, two percentage points. And even if we assume that NPRs substitute for youths, they&#8217;re one-to-ones, they&#8217;re competing for the same jobs, and we subtract out the drag from non-NPR youths, NPRs are still adding a material 0.7 percentage point. So that&#8217;s not a small contribution on the supply side. And it goes some ways to mitigating the impacts on rents. Now we also looked at the demand side of what contribution they made more generally on the demand side. And we use our own internal credit card data and we find that their spending, if we we count for the spending as implied by our credit card data and the feed through the accelerated effects on residential and business investment, it probably added around one percent to the level of GDP by the end of 2024. That&#8217;s also fairly immaterial. So there&#8217;s a mix of impacts here. Unambiguously, they added more rental inflation, but the boost in the supply side probably helped mitigate increases or at least substantial increases in other areas of the basket.
And the BOC&#8217;s estimates of potential output also back that up by showing that most of the increase in the underlying rate of growth in the economy, if you were to fully utilize all the inputs in the economy, most of that was driven by population over that period.
Katherine Judge: Now, in terms of the industries where we do need to see more immigration, you talk about that in the paper, health, tech, engineering. Are those matching up with the programs that foreign students are enrolling in, in post-secondary?
Ali Jaffery: This is a great question. So we looked at the evolution of labour demand and job vacancy data. And you see that in Canada over the past decade, it&#8217;s pretty clear that the labour demand is in health. This is the vast majority of the categories I&#8217;ve seen. The largest increases for labor demand are health related categories and other high skilled categories are related to engineering, related to the public service, related to finance. And then when we look at what students are studying, yes, we&#8217;ve seen a material increase in STEM related students. They&#8217;re the, you know, a big increase in the share, the largest increase is due to STEM. But then we see an increase in business ⁓ and very little change in health and engineering. Those shares are very slightly up. And then some of the arts disciplines are seeing a large decline. So, it&#8217;s kind of a mixed record and where we see the greatest increase in labor demand, we&#8217;re not seeing that in what students are studying. And this current wave or this recent wave of student immigration was mostly concentrated in business related studies in colleges and vocational schools. So there&#8217;s an increased misalignment, I would say, between what the future labor market or the current labor market in Canada demands and what this latest wave of immigration of students has produced.
Katherine Judge: Now, is there any scope to benefit from the US&#8217;s tightening up on immigration? Like, could Canada see an influx of higher skilled individuals that choose to not go to the US because they&#8217;ve tightened up their stance?
Ali Jaffery: I hope so. I think this is an opportunity for us to rethink our broader immigration strategy. And although there&#8217;s been some past missteps here by just very aggressively promoting immigration without concurrently fixing our housing market, it wouldn&#8217;t be wise to kind of throw the baby out with the bathwater here. I think we should still prioritize getting the best and the brightest students we can that we can house sustainably and it should be part of our overall framework for attracting high skilled immigrants. And we&#8217;ve done that pretty well actually in the past before this current surge. There&#8217;s a wide ranging literature that shows that we&#8217;re better at retaining high skilled immigrants from STEM fields, that many international students transition to permanent residency that are studying at some of our best universities.
So we need to capitalize on that, but we just need to be cognizant of the supply side and what these students study in the country. And that should be within a framework of around 1% population growth, which is that 2000 to 2015 period where we actually had solid per capita GDP growth.
Katherine Judge: And now where do you see NPR targets going ahead? Like we still have an aging population. We have vacancies in some key industries. Are we going to return to higher numbers in the coming years for NPR?
Ali Jaffery: You know, this is a good question. I don&#8217;t have a crystal ball to know exactly what the government is going to do. But I would be surprised if we see high numbers in the future. You know, I think it&#8217;s up to the government how to allocate this. But the 2000 to 2015 regime is a good kind of lens for the overall health of the economy in terms of aggregate population growth.
But the economy didn&#8217;t suffer drastically either when we increased NPRs from 2015 to 2019. So we should think about a composition that maximizes growth, but we want a sustainable level of population growth. And I think they&#8217;re thinking about that. But really, there&#8217;d be a lot of benefits for Canada to try to bring in the highest quality people, particularly high quality students, on a sustainable basis.
Katherine Judge: Great. So thanks for the insight, Ali. I think this is a good place to end. Our listeners can find your paper on the CIBC Economics website. And thank you to our listeners. And until next time, we&#8217;ll be keeping our eyes on the economy and calling it as we see it. Thank you.
Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.
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Podcast: Canada’s student immigration surge: Neither a blessing, nor a curse

CIBC Economics

Katherine Judge

Senior economist

CIBC

Ali Jaffery

Senior Economist

CIBC

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