Canadian economists believe there could be an unusual solution to the problems befalling the G7 economy: Donald Trump’s return to the White House.
The US president-elect might have already threatened a blanket 25 per cent tariff on all exports from its northern neighbour and played a role in the resignation this month of finance minister Chrystia Freeland.
But some say a second Trump term is the impetus Canada needs to deal with a severe backlog of structural problems that have left it trailing the US in productivity, growth and wages.
William Foster, a senior vice-president in the sovereign risk group at Moody’s, said the Trump “stress test” was an opportunity to realign Canada’s economic focus. “It has the resources, it just needs to figure it out,” Foster said.
Social-economic indicators across Canada show large parts of the population are being left behind.
In March 2024, there were more than 2mn visits to food banks in Canada — the highest number in history — a 6 per cent increase compared with 2023, and a 90 per cent increase compared with 2019, according to the NGO Food Banks Canada.
Unemployment is rising, at about 7 per cent, and Canada’s household debt is the highest in the G7, making the population particularly vulnerable to a recession.
Weak productivity, along with exchange rate movements, have meant Canadian wages and salaries are now lower than those in all 50 US states, according to an October report from the Fraser Institute, a Vancouver-based think-tank.
Robert Asselin, a former government adviser who is now at the Business Council of Canada, said the country’s economy had become “structurally weak” as it mainly relied on consumption and real estate.
Last week, when announcing another interest rate cut, Bank of Canada governor Tiff Macklem said there were “mixed signals in the data”, adding population growth and public sector spending were keeping Canada’s GDP afloat.
Inflation is now within Canada’s 2 per cent target range — down from 7 per cent in 2022 — but when Freeland resigned, on the day she was due to present the country’s Fall Economic Statement, an Angus Reid Institute poll found that 38 per cent of Canadians said they were worse off now than 12 months ago.
“This is the lowest this measure has been since 2021 but is still much higher than data seen in ARI’s 14 years of tracking those data,” the pollsters said.
Alex Whalen, policy director at the Fraser Institute, said Canada’s troubles stemmed from an “investment crisis”.
“We need restrained government spending, widespread tax reform and an improved investment climate beginning with, among other policies, reversing the recent capital gains tax hike, for large profits on asset sales, and phaseout of accelerated depreciation,” he said.
Productivity and innovation — the twin pillars that have helped the US economy race ahead of its G7 counterparts in recent years — have become a sore point for Canada.
“An innovative, productive and competitive economy will result in higher wages and better job opportunities for Canadian workers,” Asselin said.
Canada was the 18th most productive economy in the OECD in 2022; in 1970 it was sixth. This year, labour productivity was 1.2 per cent below pre-pandemic levels, having fallen for 14 of the past 16 quarters.
Jonathan Garbutt, a Toronto-based tax lawyer, said that despite numerous government funds for research and development, Canada did not foster a competitive technology and innovation sector.
“When young Canadian entrepreneurs ask me for my best tax advice, I say, go someplace south that values entrepreneurship and rewards people for taking risks,” he said.
While the US’s stellar growth may be envied in Canada, the country has benefited from a centuries-old trading relationship with its southern neighbour that is worth about C$1.3tn ($910bn) annually.
About 80 per cent of Canada’s exports flow to the United States, with the automotive industry, oil and gas, steel and critical minerals such as uranium central to the relationship.
Should Trump carry out his threat to rip up the North American free trade deal, the USMCA, with Canada and Mexico when he returns to office on January 20, it would remove one of the remaining strengths of the Canadian economy and likely tip it into recession.
Differences between Freeland and Prime Minister Justin Trudeau over how to respond to what the former minister described as Trump’s “aggressive economic nationalism” prompted her to quit after four years in the post.
Her resignation letter criticised a number of Trudeau’s pre-election giveaways — including tax-free Christmas trees and a proposed C$250 cheque for nearly half the population — at a time when Ottawa “faces a grave challenge” from the US president-elect.
An election must be held by October and Conservative opposition leader Pierre Poilievre is significantly ahead in the polls.
Using slogans such as “axe the tax”, Poilievre, a 45-year-old career politician, has hammered Trudeau on the struggling economy.
Regardless of who wins the next election, Trump’s victory in the US was “a wake-up call”, said Jim Thorne, chief market strategist for Wellington-Altus Private Wealth.
“We are witnessing the great deterioration of the Canadian economy in the post-WWII era and Ottawa and Bay Street have yet to fully recognise the rapid decline.”