Population Growth Pushing Up Forecasts: Scotiabank’s Forecast Tables

• Record population growth is forcing an upward adjustment to forecasts of economic activity this year and next.

• The impact of this demographic boom is most felt on consumption and labour supply.

• The strength in population growth is leading us to raise our estimate of potential output such that inflationary pressures coming from the output gap are roughly unchanged from our previous forecasts. Inflation is still expected to hit the Bank of Canada’s 2% target in 2025.

• Owing to the stability of the output gap and inflation relative to previous forecasts, we are maintaining our view that the Bank of Canada will keep rates at current levels until 2024Q2, at which time a series of gradual cuts will begin.

• As in our previous outlooks, risks to the rate path are tilted to the upside given the latest in a series of upward revisions to growth.

An upward revision to forecasts is once again necessary for Canada. Incoming data so far this year have remained surprisingly strong, particularly in the interest-sensitive sectors of the economy. Much of this can be accounted for by residual pent-up demand for consumption and housing, which are both linked, in part to the record increases in population that have been observed in Canada (among a broad range of other factors). Those increases have boosted demand as new residents purchase goods and service, but also likely dampened upward pressure on wages as they join the workforce by boosting the supply of labour. This surge in population growth is leading us to revise our estimate of potential output—the economy’s non-inflationary growth rate—by about 0.2% per annum, in line with the Bank of Canada’s own revisions to this measure of activity. This leads us to revise upwards our forecast for economic activity in Canada this year and next, with minimal impacts on our inflation forecast as the output gap—a measure of inflationary pressures defined as the difference between actual output and potential output—remains relatively unchanged. As a consequence, this forecast update does not foresee any changes to our rate outlook relative to our previous forecast despite this stronger growth.

The rapid pace of population growth sets a very high bar against which to see outright reclines in economic activity. As a result, we are now only expecting a mild one quarter decline in economic activity in 2024Q1 with only modest growth of 0.2% in 2023Q4, following an advance of 0.7% in 2023Q3. We had previously expected very small declines in GDP growth in both 2023Q3 and Q4.

The spectacular rise in population growth and its impact on economic activity must be viewed in a historical context to truly appreciate the extraordinary outcome. Population growth is on pace to exceed the record growth observed last year, in which roughly one million new residents landed. Population growth in 2023Q2 is nearly triple the pre-pandemic historical average (chart 1). That record pace accelerated through the end of the second quarter setting the stage for an even larger acceleration in the third quarter. With such powerful tailwinds, it seems highly unlikely that the economy will contract in the current quarter. 

Moreover, this population growth is contributing to the strength in consumption observed thus far in the year. We wrote some time ago about the pent-up demand on the household side and how that would lead to strong consumption. This has clearly been the case. Though pent-up demand for goods and services is slowly falling as consumption remains healthy (chart 2), the surge in population is keeping the demand for these items stronger than we had thought possible. 

While the strength in population growth is clearly raising growth, a different picture is revealed by real GDP per capita. Population growth is exceeding that of the economy and in so doing is depressing output per capita. It is no surprise then that Canadians indicate some discomfort with the state of the economy even though the outlook is better than earlier forecast. There may not be a technical recession in the country (defined as two quarters of falling economic activity) when looking at GDP, but we should see a sizeable decline in real GDP per capita this year.

Given the upward revision to potential output and largely matching increase in real GDP, inflation pressures are forecast to be in line with what) we have been expecting in the last few forecasts. Headline inflation is still expected to continue to decline gradually as the impact of year-ago developments (largely gasoline prices) are reflected in incoming data. We expect total inflation to average 3.7% this year and fall to 2.4% next year. Core measures of inflation should follow a similar path as the impacts of monetary policy on output cumulate. Inflation, either total or core, is expected to return to the Bank of Canada’s 2% target in 2025.

Owing to the relatively stable inflation outlook relative to our previous forecasts, we have not changed our rate forecasts in Canada. We believe the Bank of Canada’s tightening cycle is at an end and that it will begin a series of gradual cuts beginning in 2024Q2. That view is of course conditional on the economic slowing we project. If the economy remains more robust or if core measures of inflation remain stubbornly above 3%, Governor Macklem would need to raise rates further. As a consequence, the risks to the policy rate in the short run are clearly to the upside.