Economists at the National Bank of Canada have recently identified a potential “population trap” within the country’s growth trajectory. This report explores the implications of this concept, examining the conditions under which rapid population expansion can hinder economic progress. The core argument is that Canada’s current population growth, largely driven by immigration, is straining the nation’s capacity to absorb new residents and maintain a rising standard of living.
The concept of a population trap, as defined by the Oxford dictionary, describes a situation where an economy’s living standards stagnate because the population is growing so rapidly that all available savings are used to maintain the existing capital-labour ratio. Stéfane Marion, one of the National Bank economists who authored the report, likened this to a toolbox not big enough to hold all the tools needed by the new population. He explained that if three people are invited into the country and only two hammers are provided, the third person lacks the necessary capital and cannot be as productive as the other two. This limitation impacts overall economic output.
Canada’s population experienced a significant increase in 2023, rising by over 1.2 million, or 3.2 percent – five times higher than the average for nations within the Organisation for Economic Co-operation and Development. This rapid growth presents an absorption challenge, particularly given that Canada’s workforce isn’t aging as quickly as the average OECD nation. The most visible manifestation of this challenge is the severe housing shortage. The country’s housing supply deficit reached a record high of one housing start for every 4.2 people entering the working-age population, compared to a historical average of 1.8. This imbalance highlights the strain placed on capital stock, which encompasses more than just housing, including infrastructure, hospitals, schools, machinery, and software. To address this, Canada relies on attracting foreign capital, but this is complicated by a current account deficit.
To effectively escape this population trap, the economists at the National Bank recommend setting population growth goals in conjunction with the constraints of Canada’s capital stock. They suggest a target of total population growth not exceeding 300,000 to 500,000 annually. Achieving this would allow for investment in capital goods and infrastructure, essential for maintaining and increasing the standard of living. Marion emphasized the importance of aligning population growth with foreign capital investment to ensure an upward trend in per capita GDP. This approach would allow Canada to proactively manage its growth, preventing a scenario where rapid population increase undermines economic potential. The long-term sustainability of Canada’s economy is intrinsically linked to its capacity to adapt and invest alongside its growing population.
