Soft landing in the spotlight

After several months of highlighting the mounting arguments for a soft landing, we’ve taken the leap and formally upgraded the likelihood of a U.S. soft landing from 40% to 60%. This is significant. It means that a soft landing is now the single most likely economic outcome. By extension, a recession is no longer our base-case scenario.

Before popping the champaign cork, several caveats are in order:

• One is that there is nothing final about this assessment. The likelihood of a soft landing could rise or fall from here. It is not impossible that a hard landing could become the more likely scenario again at some point in the future.

• This is not a new scenario. We have always believed that a soft landing was possible, albeit with a lower likelihood than today.

• Conversely, the recession scenario may have retreated, but it isn’t gone. Events with a 40% likelihood aren’t much short of a coin flip and they manifest all the time. Yield curves are still inverted. Some econometric models still point to a recession. Global trade is still retreating. U.S. unemployment has bottomed. Any number of other indicators continue to flag the ongoing chance of a recession. The point is that there are still two entirely viable scenarios in play.

• Furthermore, the U.S. remains the healthiest of the developed-world economies. Whereas the risk of a recession is now just 40% there, it is arguably more like 50% for the U.K., the Euro area and Canada.

• Finally, a soft landing does not necessarily mean rollicking economic growth. We assume that a soft landing includes a period of underwhelming growth, albeit much better than a recession.

But for all of these cautionary considerations, a soft landing is now more likely than before. Indeed it is the most likely outcome.

Why is a soft landing more likely?

1. The U.S. economy remains surprisingly resilient, exceeding expectations again and again despite high interest rates. At some point, one can no longer ascribe this to chance. The U.S. economy enjoys a buoyancy that may keep it in good stead going forward and it would be foolish to ignore that.

2. If anything, there has been a small economic acceleration in recent months. The Citi Data Change Index is improving for the U.S. and Europe in particular. There is therefore no evidence of a tentative swoon. The timing of this is important, because we have long thought that the first half of 2024 would be make-or-break for the recession forecast. We are now almost halfway through that time period, with nothing having broken so far.

3.  To the extent that high interest rates are the main economic headwind that could induce a recession, yields are now somewhat lower than their peak, removing some pain. If rate cuts are delivered mid-year, as the market imagines, that will further help.

4. Our business cycle scorecard is now getting confused. Although it still believes this is probably a fairly late point in the business cycle, a significant fraction of inputs to the scorecard now argue that a new cycle is beginning (see next chart). That would mean a recession was avoided at the tail end of the prior cycle.

U.S. business cycle scorecard is getting confused

As of 02/02/2024. Calculated via scorecard technique by RBC GAM. Source: RBC GAM

1. A number of historically powerful recession signals are now reversing, unfulfilled. We detailed and charted five of these in the last #MacroMemo – a newly rising Institute for Supply Management (ISM) Manufacturing Index, reviving intentions to buy large durable household goods, rising RV shipments, a falling inventory-to-sales ratio and rising S&P 500 profit margins. Other examples include a falling Senior Loan Officer Survey (see next chart) and a Duncan Leading Indicator that is no longer clearly declining (see subsequent chart). In all cases, these variables are no longer predicting a recession. For many, it is the first time in decades that they have failed in this regard.

U.S. business lending standards have loosened

January 2024 Senior Loan Officer Opinion Survey on Bank Lending Practices. Source: Federal Reserve Board, Macrobond, RBC GAM

Duncan Leading Indicator is inching higher

As of Q4 2023. Shaded area represents recession. Sources: U.S. Bureau of Economic Analysis, Haver Analytics, RBC GAM

1. Risk assets are currently feeling exuberant. Whether they have gotten ahead of themselves or not, the positive wealth effect and the positive confidence effect radiating from this increases the probability of a positive economic outcome.

Consequences of soft landing

The main consequence of a soft landing is that a recession is avoided. This is obviously good news for the economy.

But there are also other implications.

Key among them, it will be a little harder for inflation to settle down. Without recession-induced labour market weakness, slack consumer spending and an acute drop in corporate pricing power, it will be harder to pull inflation from 3%-plus down to 2.0%. Our new forecasts now predict a longer and slower journey down to normal inflation. This is an unwelcome side effect.

If a soft landing does happen, it will be difficult to fit in even four rate cuts over the span of 2024, between the lack of economic urgency and stubborn inflation. Of course, if a hard landing happens, then double that could easily transpire.

Relatedly, central banks are now in a worse position to cut rates. At one point, financial markets wholeheartedly embraced the idea of a March Fed rate cut. Now, however, this is almost completely priced out. The May decision has also been downgraded to a low likelihood, with the June and July decisions hovering just barely above a 50% pricing for each.

If a soft landing does happen, it will be difficult to fit in even four rate cuts over the span of 2024, between the lack of economic urgency and stubborn inflation. Of course, if a hard landing happens, then double that could easily transpire.

For financial markets, it is tempting to conclude that an upgraded probability of a soft landing argues for more risk taking. All else equal, it does. But financial markets have now so embraced the notion of a soft landing that one worries they are priced to perfection in a way that could leave less upside if a soft landing is indeed achieved, and considerable downside if a hard landing instead arrives. As such, the shift in macro view does not demand a major shift in tactical asset allocation, especially given where valuations and risk premiums currently exist in the stock market versus the bond market.

If a soft landing is achieved in 2024, a key question then arises: “What happens over the next few years?” It isn’t necessarily a happy-ever-after situation. In fact, it would be quite unusual to sustain a multi-year period of growth after unemployment rates had already plumbed the depths and when the economy is operating somewhat above its sustainable potential.

This is ultimately a conversation for another day, but the debate is whether a recession would inevitably arise within the next several years, or whether instead the air can be let out of the balloon in an orderly and gradual way that avoids bad outcomes and allows for a lengthy expansion.

Puzzling economic disconnect

In the rest of the developed world there has been genuine economic weakness. The U.K., Japan and Germany have each now suffered two consecutive quarters of declining gross domestic product (GDP). This is popularly referred to as a ’technical recession.’ But a true recession requires something more than this: usually there is real suffering in the labour market, companies are losing great gobs of money and risk assets are in serious retreat. These other things just haven’t happened at any scale this time.

Labour markets have remained especially resilient, in sharp contrast to GDP trends (see next three charts). Despite a shrinking economy, the U.K. unemployment rate is actively improving and it is a full standard deviation below its normal level. It is precisely the same situation in Japan. Germany’s unemployment rate is admittedly inching higher, but its level is still entirely normal.

U.K. economy-employment disconnect

Gross domestic product (GDP) as of Q4 2023, unemployment as of December 2023. Unemployment rate was normalized over the last decade and plotted on an inverted axis to show good economic data in the same direction. Sources: U.K. Office for National Statistics (ONS), Macrobond, RBC GAM

Japan economy-employment disconnect

Unemployment rate was normalized over the last decade and plotted on an inverted axis such that a high reading indicates a strong labour market. Sources: Japan Cabinet Office, Macrobond, RBC GAM

Germany economy-employment disconnect

Unemployment rate was normalized over the last decade and plotted on an inverted axis such that a high reading indicates a strong labour market. Sources: German Federal Employment Agency, Macrobond, RBC GAM

Mechanically, the combination of rising employment and falling output can only be explained by declining productivity. But this can hardly be a permanent new trend, as education levels are not falling significantly and technology continues its incessant advance – key underpinnings for productivity growth. We remain sympathetic to the idea of labour hoarding – that businesses will hang onto workers more than usual this cycle when faced with economic weakness. But that isn’t obviously what is happening now as many companies are hiring outright, suggesting little distress.

This is a puzzling situation. We don’t fully understand it. Whatever the reason, such calm in the face of weak economic demand provides another argument against a deep recession – the panic factor has seemingly been removed from the equation.

U.S. politics and fiscal affairs

Politics

The U.S. presidential race has come further into focus with the results of the South Carolina Republican primary. The vote heavily favoured Donald Trump even though his opponent – Nikki Haley – was a former governor of the state. It is virtually assured that he will win the nationwide delegate race at this point.

Another risk to a Trump nomination is the various legal challenges he faces. Despite some heavy financial penalties recently levied upon him, legal experts believe it is unlikely that any of the criminal cases will be resolved quickly enough to impede his presidential aspirations. As such, it very much appears that the 2024 election will be a reprise of the 2020 election with Biden versus Trump.

Fiscal affairs

Turning to fiscal matters, funding for the U.S. government once again runs out on March 1. Given three recent examples of successful extensions (and the voter anger that a government shutdown would induce in an election year), another continuing resolution is quite likely.

Looking out over the next year, the standard argument is that the U.S. will lose its fiscal tailwind, instead suffering a moderate fiscal drag in 2024 (see next chart).

U.S. fiscal policy to become a drag on growth in 2024

Fiscal impulse is defined as the change in general government structural balance as percentage of potential GDP from the previous year multiplied by minus one. Sources: International Monetary Fund (IMF) World Economic Outlook (WEO) October 2023, Organisation for Economic Co-operation and Development (OECD) Global Economic Outlook, November 2023, Macrobond RBC GAM

That isn’t a bad base-case assumption, but it must be said that most of the risks extend to the upside – toward less of an economic drag. There are four supportive factors:

1. First, and undeniably the wooliest of the bunch, is the idea that “Team Biden” – the White House, Treasury Department and (indirectly) the Federal Reserve – won’t let the economy get into trouble in 2024. For the political wing, this is an election year. All stops will be pulled out to re-elect Biden. For the Fed, we have already seen the force with which it responded to the regional banking crisis last year. It is presumably disinclined to let a soft landing slip away this year if it can do so without compromising its inflation objective.

2.  Despite a divided Congress, there is apparently room for a range of executive orders to unleash a flow of government money if needed. This includes the possibility of extending the application window for the small business employment credit (though, complicating matters, a different piece of legislation proposes to cancel the fraud-ridden program). We could also see debt relief for student loans, limiting credit card late fees, spending down the Treasury Department’s general account, releasing oil from the Strategic Petroleum Reserve, or a resolution to avoid implementing previously agreed-upon spending cuts.

3.  State and local governments have accumulated triple their normal level of financial reserves, with the expectation that they will spend a fair chunk of this down in the coming year. State and local government spending is more than 50% of federal spending – a considerable $3.5T annually. Furthermore, by virtue of balanced budget requirements, state and local spending is famously pro-cyclical. This isn’t very helpful during recessions, but during a period of growth such as this one, it argues that state and local governments will be able to provide some economic support.

4.  The House of Representatives recently passed a piece of tax legislation worth a minimum of $78 billion and potentially several hundred billion dollars. It proposes to boost the child tax credit and allow for accelerated depreciation on corporate research and development. The program is theoretically fully funded, such that there isn’t a positive fiscal impulse emerging from it. However, the reality is that it could have a positive effect given a high marginal propensity to spend among families and the productivity-enhancing effects of additional research and development. This legislation has not yet been passed in the Senate, nor is it certain to, but the bipartisan support it received in the House suggests that there is a very real possibility that it succeeds. If it does, it would provide additional economic support in 2024 and beyond.

In short, the soft-landing argument is bolstered should additional fiscal support arrive, in any of the four ways detailed above.

Odds and ends

Artificial intelligence (AI) boom

The AI boom continues, with the latest earnings from AI-oriented chipmaker NVIDIA again exceeding expectations and revealing explosive growth.

The average person has been able to access advanced text-generation AI technologies for over a year. Now, image generators are becoming widely available, with video creators seemingly on their heels. The rate of progress in natural language-based AI is truly remarkable.

Enthusiasm for artificial intelligence continues to mount, at least as measured by how often the term ‘artificial intelligence’ is searched for on Google (see next chart).

Trending now: Worldwide Google searches on artificial intelligence continue to rise

As of February 4, 2024. 23417118. The weekly number of Google web searches for the topic relative to the total number of searches on Google over time is scaled and normalized to arrive at the search interest over time. Sources: Google Trends, RBC GAM

In the short run, the economic benefits from this new AI boom extend primarily to additional capital investment (see next chart). Some companies seek to develop new technologies while others acquire technologies for business use. It cannot be said that recent quarters experienced a sudden leap forward. But the upward trend in cap ex as a share of GDP in the U.S. is remarkable over a multi-year period.

Capital investment in U.S. has surpassed pre-pandemic levels

As of Q4 2023. Sources: U.S. Bureau of Economic Analysis, Macrobond, RBC GAM

Within this, investment in intellectual property has enjoyed especially impressive growth over the past five years (see next chart).

Overall capital investment in U.S. has surpassed pre-pandemic levels

As of Q4 2023. Shaded area represents recession. Sources: U.S. Bureau of Economic Analysis (BEA), Macrobond, RBC GAM

Later, productivity growth should accelerate as these new technologies are properly put to use. As we have reported before, for the moment we have inserted a placeholder assuming that productivity growth will run a few tenths of a percentage point faster than normal per year. This would be significant and welcome, though the risks clearly extend to the upside. Generative AI could be the next general-purpose technology that accelerates productivity growth by multiple percentage points per year over the period of a decade or longer. But that isn’t visible in the actual data just yet.

China mortgage rate cut

China’s central bank cuts its benchmark for mortgage interest rates from 4.2% to 3.95%, with the intent of supporting the country’s feeble housing market. We expect more economic support in the coming month as the country convenes a high-level economic policy meeting.

Regional banking stress

After a bout of intense regional banking stress in the U.S. in the spring of 2023, there has been a pip of additional trouble over the past month. New York Community Bank encountered serious indigestion of its own after acquiring Signature Bank – one of the banks that had collapsed last year. In addition to now handling the assets of Signature Bank, New York Community Bank’s newly increased size now obliges it to keep more cash on hand, reducing profitability. The company’s stock has fallen sharply.

More broadly, financial institutions continue to grapple with losses. We’ve seen rising loan delinquency rates (see next chart). We’ve seen unrealized losses on bond portfolios (see subsequent chart). We’ve seen losses on other forms of locked-in loans and exposure to commercial real estate losses.

On this last front, one recent piece of analysis argued that U.S. banks don’t have enough loan loss reserves set aside for the scale of commercial real estate losses they are exposed to. While this could be true, it is worth recalling that banks also hold ample capital and can absorb losses through their earnings.

U.S. consumer loan delinquency is now rising

As of Q3 2023. Sources: Federal Reserve Bank of New York, Macrobond, RBC GAM

Unrealized gains (losses) rising on investment securities held by FDIC-insured institutions

As of Q3 2023. Sources: Federal Deposit Insurance Corporation (FDIC), Macrobond, RBC GAM

But the broader point is that there are still challenges of varying magnitudes facing the financial sector – a downside risk for the broader economy.

Lacklustre economic breadth in U.S.

Another point of economic caution comes from fascinating diffusion indices that gauge the fraction of U.S. states experiencing adverse economic conditions.

To be sure, out of a pool of 50 states, one can nearly always find a handful with shrinking economies or rising unemployment rates. In many cases, this may just be noise as data fluctuates from month to month. But when a significant fraction of states report that unemployment is rising or that their economies aren’t growing, that is worth heeding.

Currently, nearly half of U.S. states report a rising unemployment rate. Historically, all but once in the past 50 years, whenever this happened a recession resulted (see next chart). Providing a less grim interpretation, the fraction of states with a rising unemployment rate appears to have stalled out recently. This simply did not happen at any point during prior recessionary cycles.

Almost half of U.S. states are reporting rising unemployment

As of December 2023. Source: U.S. Bureau of Labour Statistics (BLS), NBER (National Bureau of Economic Research), Macrobond, RBC GAM

There is similar pessimism on display in terms of the fraction of U.S. states experiencing a flat or shrinking economy (see next chart). Approximately half of states are currently reporting no growth – a level that resulted in a recession in six of the seven other such instances over the last half century. The recession risk certainly isn’t zero today!

About half of U.S. states are showing increasing activity

As of 12/2023. Sources: Federal Reserve Bank of Philadelphia, NBER (National Bureau of Economic Research), Macrobond, RBC GAM

Disappointing inflation

The U.S. Consumer Price Index (CPI) for January suffered a substantial miss to the upside. Headline CPI came in at a disappointing +0.3% month over month (MoM). Core inflation came in at an even worse +0.4% MoM. The trend in both has been discouraging for several months (see next chart).

U.S. Consumer Price Index monthly trend disappoints

As of January 2024. Shaded area represents recession. Sources: U.S. Bureau of Labor Statistics (BLS), Macrobond, RBC GAM

Investors had become somewhat complacent about inflation in recent months, so this is a useful reminder that inflation has not yet been definitively cracked. This revelation is a big part of why the Fed is no longer as enthusiastic about cutting rates in the near term. It also says something about the ways a strong economy complicates the effort to tame inflation. As an example, the fraction of American businesses planning to raise prices has recently increased again (see next chart).

Fraction of U.S. businesses planning to raise prices again

As of January 2024. Shaded area represents recession. Sources: National Federation of Independent Business, Macrobond, RBC GAM

In contrast to the U.S., the U.K. and Canada – countries with notably weaker economies – published quite promising inflation figures that showed a nice drop in January. Economic strength is definitely part of the U.S. inflation story.

Although we have been forced to upgrade our inflation forecasts in response to the shift in our base-case economic outlook from recession to a soft landing, we still believe there is scope for inflation to gradually settle down over the next two years.

Real-time measures give mixed readings for the upcoming February data. The Cleveland Fed’s nowcast argues things may remain toasty. The Daily PriceStats Inflation Index argues February should look somewhat better, though not markedly so (see next chart).

U.S. Daily PriceStats Inflation Index improves slightly

PriceStats Inflation Index as of 02/23/2024. Consumer Price Index (CPI) as of January 2024. Sources: State Street Global Markets Research, RBC GAM

Another promising sign is that shelter remains the overwhelming inflation driver in the U.S., representing nearly three-quarters of the overall price increase (see next chart). This is good news because rent inflation has slowed and the lags associated with shelter CPI continue to argue for a further deceleration in the coming quarters. However, the details of the report were not all positive beyond this, as core services ex-shelter rose by 0.8% on the month. It isn’t just shelter inflation at work, although the other hot parts of the price basket represent a pretty small share of the index.

What’s contributing most to latest U.S. monthly inflation rate

As of January 2024. Sources: U.S. Bureau of Labor Statistics, Macrobond, RBC GAM

We also shouldn’t neglect that the other inflation measure – the Personal Consumption Expenditures (PCE) deflator – has looked quite good in recent months. In fact, it’s to the point that the 6-month annualized rate of change for the index is just 2.0% (and the core PCE deflator equivalent is just 1.9%). That’s bang on target. (That said, the January release will probably look a bit worse).

A final promising thought about inflation is that the price of natural gas continues to fall. This is especially notable in North America, where Henry Hub pricing has plummeted by more than half since November (see next chart). That should help inflation over time.

Natural gas prices dropped on strong production

As of 02/23/2024. Sources: Chicago Mercantile Exchange (CME), Macrobond, RBC GAM

Canada’s immigration boom

Canada has recorded extraordinary population growth over the past few years, fueled by immigration (see next chart). The country added 1.25 million net new people in 2023. That’s nearly twice the prior record and the fastest population growth rate in the developed world.

The country officially has 40.5 million people as of October. However, a fresher estimate that also includes those residing in the country on expired visas and those misidentifying themselves as non-residents would likely be approaching 42 million people.

Canada’s record population growth fueled by immigration

As of Q4 2023. Sources: Statistics Canada, Macrobond, RBC GAM

The rapid population growth has been right across the country, if disproportionately in Ontario. More than half a million people arrived in the province in just the last year (see next chart).

Breakdown of Canada’s record population growth, fueled by immigration

As of Q4 2023. Sources: Statistics Canada, Macrobond, RBC GAM

The result of this is that 23% of the Canadian population was now born outside of the country – a modern-day high that exceeds the prior record set in the early 20^th century (see next chart).

Immigrant percentage of population reaches record high

Immigrant refers to a person who is, or who has ever been, a landed immigrant or permanent resident. Immigrants who have obtained Canadian citizenship by naturalization are included in this group. Sources: Statistics Canada, RBC GAM

The immigration boom is a function of several rising trends (see next chart).

Canada immigration by type

Data shows number of permanent and non-permanent immigrants entering Canada each year. Sources: Government of Canada Immigration, Refugees and Citizenship, RBC GAM

1. The federal government has set a robust target for nearly 500,000 additional permanent residents per year. This is nearly double the rate that prevailed a decade ago (see next chart).

Number of new permanent residents per year reaches record high

Permanent residency is a status granting someone who is not a Canadian citizen the right to live and work in Canada without any time limit on their stay. Sources: Immigration, Refugees and Citizenship Canada, RBC GAM

1. The number of international students in the country now exceeds one million. It surged by nearly 250,000 people over the past year alone (see next chart). There are now more than three times as many international students as a decade ago.

   The sharp increase is not so much a conscious government policy. It’s more what happens when there isn’t a cap on international students and post-secondary educations are able to charge international students several times more than the domestic tuition rate -- all at a time when government funding for post-secondary education has not kept up with costs. Anecdotes also abound of diploma mills and private educational institutions seemingly acting as an immigration back door, especially after the government eliminated a 20-hour workweek restriction for foreign students. Historically, around half of the international students who come to Canada stay afterward and enter the workforce.

International students with a valid study permit have surged

Sources: Immigration, Refugees and Citizenship Canada, RBC GAM

1. There has been a similar explosion in the number of temporary foreign workers in Canada. This program is also uncapped and businesses are heavily incented to fill low-skill positions with foreign workers given that even low Canadian wages are highly attractive to workers from poorer countries. Also, Canada has experienced a labour shortage in low-skill service sectors in recent years and temporary foreign workers can be more reliable as they are less likely to abruptly quit their jobs given that they cannot easily transfer their work permit to another.

   There are now nearly 800,000 temporary foreign workers in Canada, representing a sharp 300,000 increase from the prior year as part of a rising trend (see next chart). About 30% of Canada’s temporary foreign workers become permanent residents within a decade.

Number of temporary foreign workers surges

Sources: Government of Canada, RBC GAM

1. A smaller factor is a surge in refugee claimants (see next chart). The number of refugees claiming asylum in 2023 was more than 50% greater than the year before (which itself had been considerably higher than recent years).

Refugees claiming asylum each year also surges

Sources: Government of Canada, RBC GAM

1. Finally, though ill-defined, it would appear that population growth is being significantly underestimated. Many people in Canada on expired visas fail to follow the government’s instructions to leave the country. This is estimated to represent another 750,000 people, though it is unclear the extent to which this number is growing (and thus contributing to population growth). Given that virtually all such people arrived via temporary visas, and that three main sources of temporary residency are all surging (international students, temporary foreign workers and refugees), it stands to reason that this category is probably also rising quickly.

How will this change in the future?

Canadian immigration is unlikely to remain this white hot indefinitely.

The most concrete reason is that the federal government has now introduced a cap on international student visas, taking effect later in 2024. It aims to reduce the number of student visas by 35% (see next chart). But it will take some time for this to show up in the numbers, as those who already have visas will presumably continue to study for another several years.

Number of study permit holders set to decrease in 2024

Sources: Government of Canada, RBC GAM

Canada’s immigration minister has hinted that the temporary foreign worker program may also be capped in some way in the future, though the business lobby may prove more powerful than the post-secondary institution lobby. The government actually made it easier to take on temporary foreign workers within the last year. It is possible that demand for temporary foreign workers could naturally ease somewhat now that the unemployment rate has increased off its low.

There is also a chance that the country’s target of roughly half a million new permanent residents per year could also decline. This could be the result of public pressure – polling shows the average Canadian to now be much less satisfied with immigration than in the past. Or it could be because the Conservative opposition has suggested that immigration should not exceed the country’s rate of housing construction. The party is currently leading by a significant margin in the polls, with an election scheduled for 2025.

Although all of this leaves considerable room for uncertainty, it is likely that 2023 will prove to have been the high-water mark for Canadian immigration.

One might presume that a greater effort will be made to deport those on expired visas, but the government appears to be moving in the opposite direction. The immigration minister recently indicated that the country will soon create a path to citizenship for undocumented immigrants. As such, it seems reasonable to assume that there could be an increase in the number of people opting to remain on expired visas.

More generally, and looking outside of the Canadian bubble, immigration has been surging across the developed world, reflecting a rising appetite among those from poorer nations to gain access to richer nations.

Although all of this leaves considerable room for uncertainty, it is likely that 2023 will prove to have been the high-water mark for Canadian immigration. 2024 will probably still see a high level of immigration, but somewhat slower as the post-pandemic catch-up effect fades and presuming a slower growth rate in the number of international students (an outright decline in students will probably have to wait until 2025).

From there, if temporary foreign workers are capped, one might then see the rate of population growth returning to something like 500,000 per year, or briefly even less as temporary programs shrink to a more manageable size. This will still be fast by historical standards, but positively tame compared to the experience in 2022—2024.

Rapid population growth brings both benefits and costs. On the positive side, raw GDP growth can grow more quickly, business revenues rise and government finances improve. On the negative side, housing shortages are exacerbated. Productivity may also be damaged by the introduction of temporary low-skill workers, the creation of paths to permanent residency that bypass Canada’s skilled points system, and also by the inability of the capital stock to keep pace with rapid population growth.

-With contributions from Vivien Lee, Vanita Maharj and Aaron Ma