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Rodrigo Echagaray: Hi, I’m Rodrigo Echagaray, Head of Latam Equity Research and Head of Global Product Management. Canada’s surging immigration will have far reaching effects on our economy. On this episode of Market Points, I’m joined by a very exciting panel of experts from across Scotiabank to talk about the importance of immigration on the Canadian economy, the sustainability of immigration growth, and its impact on key sectors.
We’ll be speaking with Rebekah Young, Vice-President, Head of Inclusion and Resilience Economics. Welcome, Rebekah.
Rebekah Young: Thank you for having me.
RE: Meny Grauman, Analyst of Canadian Financial Services. Welcome, Meny.
Meny Grauman: Great to be here.
RE: Maher Yaghi, Telecom, Media, and Cable Analyst. Welcome, Maher.
Maher Yaghi: Thank you.
RE: And George Doumet, Analyst of Consumer Products. Welcome, George.
George Doumet: Hi Rodrigo. Thanks for having me.
RE: Canada welcomed 1.25 million immigrants in 2023, which made the headlines globally. The influx of people made a significant economic impact, but the trend seems unsustainable. Population growth should be a competitive advantage and should contribute to growth in the long term for every country.
However, sustainable immigration policies are crucial for that to take place.
Systems in Canada were not prepared. Why were numbers a surprise given policy targets? Rebekah, could you set the stage for us?
RY: Absolutely. As you say, policy makers really were unprepared for this, and if you think back even just a year ago, Canada was touting what were considered very ambitious targets for its immigration program. We’re saying we’re going to take population growth to half a million by 2025. Well, as you pointed out, we got to the end of last year and we saw population growth had been one and a quarter million.
So, that population growth was two and a half times what policymakers had been targeting. And it really was this category of temporary workers that had really been exploding. Now, policymakers were taken off guard not just because they didn’t have a target around that temporary program, but also we had a bunch of factors in the economy that were masking what was going on. Reopening effects were absorbing lots of these workers into the economy. But essentially, at the end of the day, what we realized is that we had more workers in the economy working more. We also had more consumers in the economy consuming more. But what we saw is that per worker per individual consuming less and output per worker declining, so really over the long term, not sustainable through an economic lens. But importantly, also what we saw is real life bottlenecks. So not just these kind of economic concepts that you see in data coming out every month, but in actual indicators like shelter costs, what it costs to rent, how long wait times are in ERs, or lists for family physicians. You name it, all those real life infrastructure, both social and physical, that we rely on, really face very sharp bottlenecks.
And so, really what we think when we look at all these trends, sort of where we’ve come over the past couple of years in this explosive population growth, yes, we’ve seen a number of measures that should substantially curtail this population growth by government, but we really think that not only do they need to focus on lowering the number, but we also need to raise the bar if we want to raise welfare for Canadians over the long run.
MG: And raising the bar really has important implications for the banks that I cover. If you think about it, lowering immigration numbers would make customer acquisition targets that all the banks have harder to achieve. But of course, if you change the mix, if you bring in more affluent immigrants, then the net impact could actually be positive.
So that’s an interesting dynamic here. Where it’s not just the number, but it’s also, in this case, the affluence of the immigrant really would make a difference.
RE: Thanks, Meny. Great point. We’ll get you to speak about the broader impacts on the financial sector in a few minutes.
First, let’s talk more about sustainable immigration. How do we find the right level and why is this important?
RY: That’s a great question. And first I want to start out, we need to dispel the notion that simply growing our population is going to lead to stronger or worse off outcomes for Canadians.
And I’ll give you a very concrete example. Look at two countries, Switzerland and Sierra Leone. They’re two countries of about the same population size. Obviously, very big differences in terms of welfare across those two countries. So, population alone doesn’t determine how well or not a country can function and what sorts of living standards its population benefits from.
What’s really important is that pace of population growth, because in order for population growth to be a strength for an economy, what you need essentially is complementary investments, and what are essentially the tools that these workers need.
And so, Canada doesn’t have a great track record of investing, of business investment in those sorts of tools, whether they’re physical machines and equipment, or whether it’s an intellectual property. But we’ve just had pretty abysmal business investment. And consequently, even before this explosive population growth, essentially, we haven’t had that stock or that capital stock to enable workers to produce more.
So again, that output per additional worker has been declining because we just haven’t had that same capital stock or business investment. And so what we need to do is look for that, what is that pace of population growth that businesses get the signal that cheap labour isn’t in the offing in the future, and they have that relative incentive to start investing in that non-human capital.
Or even investing in human capital, so investing in the training or the tools that are given to these workers. So, I think over the long run, what you need to think about is that, you know, that pace at which we can absorb population and also those tools that we can apply to make each worker more productive.
I think what we’ve seen though over the last couple of years essentially is that Canada, Canada’s economy, its policymakers are essentially failing that marshmallow test.
RE: That's an interesting concept Rebekah, but just in case our listeners are not familiar, what is the marshmallow test?
RY: So the Marshmallow Test is a really old psychological test that was done on kids, basically put them in a room without adults with a marshmallow in front of them and said, ‘Don’t eat it.’ If you don’t eat it when we come back, you get two. And they were able to determine that those kids that were able to hold off until the adult came back into the rooms were more likely to prosper down the road. Now there are a whole lot of caveats to that test since it was done and like, certainly conditions matter.
But ultimately I think, you know, taking that into our example of the Canadian economy is that we really kind of really focused on those near term wins, those near term satisfaction or gratification that we’re getting from immediate cheap labour and not really looking at the longer term needs. And so to give an example, we’re looking at bringing temporary workers in, into sectors that currently have vacancies, but not necessarily looking at what are the sectors that are going to really drive gains tomorrow.
I would say another component of that failing the marshmallow test is overall looking at both households and governments, and their relative investment in consumption over investment. And if you think of it in economic terms, if we invest in something, it takes savings from somewhere else.
But if we are consuming a lot at the household level, as well as government, so we’ve certainly seen prolific spending at government level, that detracts from a pool of savings, at least within our own domestic boundaries. So, we really need to think about that marshmallow test, take it to heart, and where are we going to find those savings in order to invest in those longer term productivity enhancing areas of growth.
RE: It’s important to consider execution risk in the short and the long run. Can you expand on that, Rebekah?
RY: In the last couple of months, we’ve seen a string of announcements by the federal government to try to address or get on top of this population growth that we’ve seen.
So we saw in the Fall of last year, a curtailment on international student visas, which will basically freeze the issuance of visas at our lower level. We then saw not too long ago measures to actually cull or bring down the number of non-permanent residents in the country and also slow the issuance of new visas in particular by adding more layers of bureaucracy or proof of need on the temporary program.
So we’re seeing a lot of measures that have been announced. Some of them less detailed than others, and in particular, some that will require consultation with provincial counterparts. And so I see a whole array of areas for execution risk, first and foremost, in that right now, we have a lot of demand, a lot of labor that is being filled by temporary workers.
And so there are a lot of vested interests for which this is going to be a sharp and sudden shock in terms of where they’ve been sourcing labor. So I think that there is going to be a risk of, are they able to get to the numbers that they want to, to bring those numbers down in a timely way given those interests.
I think the second part of that execution/coordination risk is around federal provincial negotiations and we’ve seen that across a whole array of policy areas.
And so we’re likely to see that playing out over the coming months as provinces and feds determine just exactly how they’re going to bring down the number of temporary foreign workers. And they have clearly indicated at the federal level that we will see that non-permanent target only in the annual number setting exercise, which comes sometime in late Fall.
So expect around December of this year to see what that number would actually look like. And meanwhile, the first quarter of this calendar year, we’ve seen population growth just explosive. And so that is where we see that execution risk that on the one hand, we still see numbers tracking up for population growth, clear intent in terms of the policy measures on the table, but really big risk and delay in terms of the timing of when we might actually see them.
And then you layer on top of that next year that we are most likely going to have an election in Canada, even compounds that policy risk of where we might see population landing at the end of this year, at the end of next year, and so forth.
RE: Rebekah, how do we measure how much pressure on GDP per capita is really coming from immigration? Could it be coming from other sources?
RY: That’s a good question. So productivity is essentially how efficiently or innovatively we’re using our inputs, those inputs being people and the tools. So in hindsight, we can look back, we know how many people we had and we know how much tools, how many machine equipment, et cetera, we had going into the system.
And we know also in hindsight what output was our GDP. So that’s, you know, that calculation is relatively simple. Now, you know, big credit to my brilliant colleague, René Lalonde, who has a very strong model of the Canadian economy. And he can tease out what impacts, you know, what, what led to this erosion of business investment over this horizon and consequently, or an erosion of stock of capital.
And so he can tease out, for example, the effects of rising interest rates over the last two years and all of those other traditional economic factors that would impact that. So netting all those impacts out, he was able to determine that roughly two thirds of the productivity declines that we saw were a result of this explosive population growth.
Now, going forward, it’s much more difficult to predict where things might evolve. So I say hindsight relatively easy using air quotes, because going forward now, we need to consider, well, where will interest rates go? Where will demand be evolving along with that interest rate path? Where will uncertainty go with a host of elections, not just in Canada, but importantly in the U.S. So a whole array of factors that, you know, otherwise outside of population growth would impact how businesses invest.
Now, that underscores why population growth is neither the driver nor the cause or the underlying cause of productivity really reinforces why Canada needs to really have a laser focused growth agenda that’s focused on enhancing productivity. So immigration policy is important. And on the margins, it can kind of tilt up or down where that productivity is going, but it can’t fix the big problem that’s been decades in the making that Canada is facing.
And ultimately, it’s not about working more or working harder. It’s about working smarter and working better equipped.
RE: Fascinating, Rebekah. Certainly some interesting insights on why immigration is such an important issue within the Canadian economy. And it seems sensible to prepare for a slowdown in immigration growth.
Let’s turn to some sectors that are impacted by these policy discussions. Let’s start with you, George.
GD: Yeah, thanks, Rodrigo.
As it relates to our coverage, the most obvious sectors are the grocery and the dollar store sectors. In terms of implications, it’s top line growth, so more specifically traffic and access to labor, and that’s a really big one.
So, on the grocery stores, it’s a mature and competitive industry. It really leans on population growth as a long-term driver. The industry typically grows same store sales in the 2 to 3 percent per year range and square footage just under 1 percent, and we’ve recently seen really strong square footage coming from the ethnic format such as T&T and Adonis.
In 2023, population growth of about 3 percent has really been helping offset a decline in per capita food and beverage consumption in Canada due to higher inflation. So you can imagine reducing the 3 percent population growth to 1 percent population growth, similar pre-pandemic levels, could really have a pretty material impact for the industry.
And the same observable trends we’re calling out here on the dollar stores. In the last few years, we’ve seen very strong traffic trends in the dollar stores. So double-digit traffic growth on top of double-digit traffic growth. And while population growth has been helping out, especially for non-permanent residents, there are other drivers here that have driven that traffic.
Predominantly a secular shift towards discount channels, especially in food and consumables, and rising dollar store penetration also in higher income consumers. Lastly, there is an access to labour angle to call out here as well. The retail industry is a top employer of new immigrants to Canada. When you look at non-permanent residents, there’s a disproportionate amount that will work in retail, food service, and also the accommodation industry.
So there’s likely some obvious implications there if you reduce access. You will likely get more wage inflation. And if you look at wage inflation in general, the highest level of inflation has been, one of the highest levels of inflation has been running in the food and beverage sectors, which have been running well ahead of CPI.
RE: Thanks George. Let’s now turn to TMT, another sector that leverages population growth to expand. Maher, can you give us details about how this has played out?
MY: When you think about telecom, immigration has been a significant and pivotal growth driver for the sector, especially on the wireless side, where wireless subscriber growth has really outperformed historical norms in Canada over the last couple of years.
So it’s important to consider what a return to a lower population growth could mean for the telecom sector in Canada. Historically, we estimate that population growth in Canada has approximately added 1.5 percent subscriber growth numbers to the overall industry. But recently, with the surge in immigration, that number has doubled.
So basically, we’re looking at a doubling of the subscriber growth over the last couple of years versus historical norm and that has supported the revenue growth of companies like Rogers, BCE, etc. in Canada. When we think about the future and if population growth returns to the norm, we have to think about how many subscribers less that these companies are going to be adding every year. We have looked at that and we estimate that, if we return to a normal historical growth pattern, the growth rate on the bottom line or the profit line for these companies is going to shrink by approximately 0.5 percent annually. So that number, when you think about it, it’s additive every year, let’s say we go back to the historical norm for three years, that’s about 1.5 percent of growth that is lost from these companies. So it’s very important, it’s a very important driver for stock performance, and we think investors have to look at that when they think about the future of the telecom industry in Canada.
RE: Meny, are the benefits and risks of fluctuations in immigration levels as clear cut in the financial services sector?
MG: So, as you can imagine like most things in banking, it definitely can get complicated. The way I think about it is immigration really impacts banks in three key ways. One is through the overall macro economy. The second way is through the housing market, and the third way is through customer acquisition that I talked about previously.
And going into detail on all those three, economic growth, obviously, immigration boosts population growth, that boosts nominal GDP, that’s a good thing. But as we know, per capita GDP in Canada is definitely sliding. The Bank of Canada has warned us about the productivity crisis, no less. And so it definitely gets more complicated from that perspective. In terms of housing, again, you have a nuanced relationship between banks and immigration.
More immigrants means more demand for housing, but of course, it’s important to have a balanced housing market. We all know of the significant imbalance between supply and demand in the Canadian housing market. Now, it’s important to highlight that immigration didn’t cause this. Even if you take immigration down to zero, you would still have a big lack of supply in the Canadian housing market. But nevertheless, on the margin, you’re adding to an imbalanced market. And so that creates stresses. Affordability is definitely an issue and can be unsustainable at some point.
In terms of customer acquisition, as you can imagine, in such a well-developed banking market such as Canada, people have existing banking relationships across the board. It’s very hard for one bank to take market share from another bank. That doesn’t stop them from trying, but definitely it’s very difficult. But if you can imagine immigrants coming into the country, most of them, probably 99 percent of them, don’t have an existing relationship with a Canadian bank, so that is very, very attractive for the Canadian banks, and they all have customer acquisition targets that in many ways depend on immigrants coming into the country. And just to give you an example, the largest banks in Canada, Royal and TD, actually have referral arrangements with Indian banks, and they’ve talked about this at, at quite a length. So, what you see here really is an example of how important immigrants are as a funnel for new customer acquisition. But as we talked about before, it’s not just the number of new immigrants that’s important, it’s the quality and the mix, the affluence is really what I’m referring to here.
So again, just to summarize here, for Canadian banks, the importance of immigration is not just numbers. But it’s also the sustainability of that immigration and, and really the overall affluence of that immigration.
MY: Meny, and this also applies in telecom pretty much, you know, when you think about how companies grab market share in the marketplace, it's very expensive to go and grab a subscriber from a competitor and bring them in. And so a lot of the companies in Canada have relied significantly on immigration for reducing the cost of acquisition of new customers. We’ve seen all these kiosks in airports. You probably have seen these kiosks as soon as you land in Canada. First thing you see is a kiosk of a telecom company trying to grab that customer.
And so when we think also about the long term growth potential for telecom, in addition to maybe a decline in expectations of new subscriber growth, the cost of acquisition could also be on the rise.
RE: This has been a fascinating conversation. Rebekah, I would like to end with some thoughts on possible solutions. What opportunities do you see for improvement?
RY: A very good start would be first and foremost, seeing immigration as a key strength for Canadian living standards and welfare over time. And that would be putting front and center, economic priorities as part of the economic immigration stream. And I put a caveat there because there are other social and moral drivers of other streams of immigration.
But if we first think of economic immigration as a core strength for overall Canadian competitiveness, then articulating that goal in and of itself is a start. And quite frankly, we have big numbers for our economic targets. But they get substantially watered down as we look at arrivals.
We have a great tool at predicting the potential of newcomers and of permanent residents that looks at things like their education, their language skillset, their work experience, to determine what their likely economic outcomes will be down the road. Well, we need to use that scoring system better to determine which candidates will have a better likelihood of success in Canada. So we should use that more, we’re not quite frankly using it very much.
We should also look at setting the bar higher for businesses. So some equivalent threshold that businesses that are both investing in their people and in their tools would see getting more labour as a source, as an incentive as opposed to a source of cheap labour necessarily. So really raising the bar in that case. And I think at the end of the day we also need to focus on investing not just in selecting those with potential but also investing in their potential once they're here in Canada.
RE: I want to thank everyone for joining us for this important conversation about Canadian immigration and the challenges and opportunities ahead of us.
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