12:22 PM EDT, 10/24/2024 (MT Newswires) -- Canada's government released its annual Immigration Levels Plan, with some significant changes that will curb net inflows in the coming years, said Bank of Montreal (BMO).

Annual permanent resident (PR) targets will be cut to 395,000 in 2025, slowing further to 365,000 by 2027. That's down from an expected 485.000 this year, and a meaningful shift down from previously planned levels of 500,000 per year going forward.

Hitting these targets might prove to be a challenge, but it implies that overall Canadian population growth will run at about zero for the next two years, wrote the bank in a note to clients. That would be a "dramatic" shift from above 3% today.

The biggest implication is that it will take stress off the Canadian economy and infrastructure that has become almost debilitating in recent years -- think housing, services and infrastructure, stated BMO.

While this move will dampen demand, all else equal -- think spending in retail, food and telecom services -- the bank needs to dispel the narrative that slower population growth will be bad for the economy.

In the job market, slack is building as job creation can't keep up with labor supply growth. Consider that the 1.7 ppt increase in the unemployment rate since mid-2022 has been driven entirely by higher labor supply, while youth (15-24) unemployment surged above 14%.

Newly-landed immigrants are themselves finding a tough job market, with unemployment in that cohort above 10%. While there are still pockets of skilled labor shortages within the Canadian economy --such as trades and healthcare -- TR inflows aren't adding much to that labor supply -- in fact, they are creating more demand.

These changes should gradually take some slack out of the job

market through slower labor supply growth.

For housing, this move will dampen price pressures and rents, all else equal -- such as rate cuts and mortgage rules). That said, the sudden shift in TR inflows should soften the rental market just as a torrent of supply is coming online in some regions (for example, Toronto condos).

Growth in average asking rent across Canada has slowed to just 2% y/y according to Rentals.ca, with outright declines seen in some markets. BMO pointed out it had long argued that Canada has a housing demand problem.

This policy change will be felt quickly and will make other supply-side measures look almost like rounding error, according to the bank.