Good morning. A monumental economic issue in Canada that has been overshadowed by the trade war is the reshaping of Canada’s immigration system. After an influx of temporary residents flooded labour markets and sent rents soaring, cuts to immigration rates are taking effect. In fact, Canada’s population is now growing at the slowest pace in a decade, outside of the COVID-19 pandemic. More on that below. But first, today’s headlines:

Energy: Saskatchewan is extending the life of its coal-fired power plants, saying Ottawa has no jurisdiction to stop it.

Rates: The Federal Reserve held interest rates steady yesterday and slowed the overall pace of expected future rate cuts in the face of the Trump administration’s tariff plans

Regulation: Convicted husband and wife fraudsters David and Natasha Sharpe must pay more than $27-million for their role in the Bridging Finance Inc. investment scheme, the Ontario Capital Markets Tribunal ruled

• Tomorrow: Canadian retail sales for April are expected to show a boost, as some consumers looked to buy ahead of tariffs
• Notable earnings today include Empire Co. Ltd., parent company of the Sobey’s chain

For reasons that have never been entirely made sense, the Trudeau government dispensed with Canada’s enviable immigration system and opened the door to a torrent of temporary workers and international students. In 2023 alone, Canada added 1.3 million people, which represented the highest rate of population growth since the 1950s. After the strains on infrastructure, housing and social services became apparent, the government set out a plan to course-correct the system.

Prime Minister Mark Carney now aims to reduce immigration to “sustainable levels” by capping the total number of temporary workers and international students at less than 5 per cent of Canada’s population by the end of 2027.

Those policy changes are starting to bring about some major demographic shifts. The national population was essentially flat in the first quarter, with growth of 0.05 per cent clocking in as the slowest non-pandemic reading since 2015.

In a country with low birth rates that has long relied on immigration as an economic stimulant, these policy changes are bound to have some major knock-on effects throughout the Canadian economy. I discussed some of the moving parts with Robert Kavcic, senior economist at Bank of Montreal.

You frame this as one of the biggest economic stories in Canada right now. Why?

It’s just a major policy change that touches on a lot of the issues that policymakers have been trying to figure out for a long time, like rent, inflation, affordability. Population growth is at the root of a lot of that.

How much did immigration policies contribute to these problems?

The population explosion we had put too much demand in a short amount of time that we couldn’t match on the supply side. The rental market was extremely tight, and the minute somebody steps foot in Canada, they need a place to stay. But it takes years to actually put that supply through the pipeline. Same thing with transportation. It’s very inflationary in the short run until we can build out to meet that demand.

You also see Canada’s productivity problems as linked, correct?

I don’t think it’s a coincidence that as non-permanent resident inflows exploded, the productivity numbers really fell off. On an economy-wide basis, there was just more leaning on low-cost labour at the expense of capital investment. It doesn’t speak to our long-standing productivity underperformance. It just made it a lot worse over the last two or three years.

How much does Canada rely on immigration to shore up our economy?

Very much. The labor supply pipeline that it brings in is absolutely necessary because Canadians don’t really have babies anymore. It’s just part of the system went off the rails.

Is this a tough time to undergo such a big demographic adjustment while the Canadian economy is under such pressure?

The question we got a lot is: Is the economy going to fall into recession because you’re cutting population growth to zero? No, because you’re taking a lot of stress off of things like service and rental inflation. That is going to allow the Bank of Canada to cut interest rates, which is a tide that lifts the whole economy. I think this actually rebalances the economy and makes it healthier.

We’re seeing rents come down, which is good for affordability, but is that going to deter investment in new housing units?

I think so. We will see construction back off now. Toronto is probably ground zero of this where rents are falling and pre-construction activity is basically non-existent.

Are there other pressure points?

There are pockets of the economy that are going to feel it. Stuff like telecom subscriptions, university enrollment. It’s just going to take some time to get the system back to normal.

This interview has been edited for length and clarity