07:12 AM EDT, 10/25/2024 (MT Newswires) -- Canada's government Thursday announced its intention to slow the number of permanent resident admissions from about 470,000 in 2023 and 485,000 this year to 395,000 in 2025, noted Desjardins.

As a result, when combined with the previously announced goal of reducing the number of temporary residents in the country, it's likely that population growth almost grinds to a halt next year. That would represent an incredible swing from the historically high 3%-plus population increase seen in 2023, said the bank.

Corporate Canada had already expressed concerns about the economic impacts of the temporary resident reduction. The revision in permanent resident targets will no doubt have executives even more worried about revenue growth and labor supply as they plan for 2025. While Desjardins believes the implications for gross domestic product growth might be muted by some offsetting factors, and so the revenue hit might not be so severe, the bank wouldn't be surprised to hear about labor shortages later on in 2025.

The goal of this plan is to allow time for the supply of housing and infrastructure to catch up with demand. But with a rapidly aging demographic, that near-term objective will come at the expense of solving Canada's longer-term labor force constraints, stated the bank.

The near-term economic implications aren't as acute as they might seem though. While Desjardins is marking down its population growth forecast for 2025 by 0.2 percentage point, the revision to GDP growth needn't be as stark.

Fewer job searchers could leave wage growth settling at a higher level than it would have been under its previous forecast. That would seemingly support the recovery in consumption per capita that the Bank of Canada is now seeking.

In addition, if the slower pace of population growth helps improve shelter affordability, households might have more cash available to spend in other areas of the economy, particularly those that have been struggling lately.

The economic impacts from Thursday's announcements don't immediately change Desjardins's outlook for the BoC. A reduction in permanent resident admissions will put roughly equal downward pressure on both the demand and supply sides of the economy. As a consequence, Thursday's announcement does little to change the bank's outlook for the output gap in Canada and, as such, the near-term trajectory of rates.

That said, given that potential GDP is an important input into neutral rate estimates, the latest changes give Desjardins even more confidence in its dovish outlook. The bank continues to believe that the BoC will need to take its policy rate down to 2.25% in 2025.

As recently as Wednesday, Canada's central bank was doubting the government's ability to reduce non-permanent residents as quickly as planned. In contrast to the changes to permanent resident admissions, the planned decrease in temporary residents, particularly students, will lower demand more than supply, since these residents weren't adding much to the productive capacity of the economy.

So, there is a risk that the central bank downgrades its view of the economy if policymakers begin to more fully incorporate the government's plans for non-permanent residents, added Desjardins. But as of right now, that's still only a risk.

It's unlikely that the BoC would make any major changes to its outlook before its January Monetary Policy Report, according to the bank.