In a lot of ways, the U.S. and Canadian economies are similar. They’re both seeing progress in the fight to rein in inflation. They both have robust employment levels.
But the American economy is growing by 4.9 per cent, while ours has been flat.
Economists warn the numbers aren’t even capturing the full extent of the differences.
“Things are actually worse than the data would suggest,” said Royce Mendes, managing director at Desjardins Capital Markets.
He says explosive population growth has inflated economic growth in Canada. Without that, the economy would be decidedly worse than it is right now.
So, why are the Canadian and U.S. economies performing so differently?
Two key factors are driving that. One is Canadian, one is American. One is well-known, the other caught almost everyone by surprise.
The first is simple. Higher interest rates are having a disproportionately harsher impact in Canada than in the U.S.
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Canadians have higher debt loads. Those debt loads renew more quickly in Canada. That means higher borrowing costs bite harder, faster here.
Most Americans have a 30-year mortgage, so rising rates don’t have as big an impact as they do in Canada, where the average mortgage comes with a five-year term.
Americans spending more, saving less
Millions of Canadian households are bracing for their renewal in the next couple of years, so they’re spending less and saving more. In the United States, households are spending more and saving less.
“The U.S. is unique insofar as Americans are actually spending down their excess savings,” Royce said. “Canadians are continuing to sit on that pile of savings because they know what’s going to happen when their mortgage comes up for renewal.”
As a result, one economy is chugging along, while the other has stagnated. Canada’s GDP has been in neutral for seven months.
A customer investigates a vehicle at a Cadillac dealership in Lincolnwood, Ill., on January 31, 2023. (Scott Olson/Getty Images)
But the way high interest rates are shaping behaviour doesn’t totally explain the disparity between the two economies, says Bank of Montreal chief economist Douglas Porter.
He says the U.S. government has been on a spending spree, introducing programs like the Bipartisan Infrastructure Deal, the CHIPS and Science Act and the climate-focused Inflation Reduction Act.
The first rolled out billions of dollars in spending to address decades of backlog in federal infrastructure, while the CHIPS act provides billions of dollars in incentives to the American semiconductor industry.
They’re all desperately needed. But they also amount to trillions of dollars in new spending.
“I would call it a sugar rush,” said Porter. “Just a wave of fiscal spending from the U.S. which has actually led to the U.S. economy doing better this year than it did last year.”
National accounts data in both Canada and the U.S. was released at the end of October.
The figures showed Canada’s budgetary picture was improving. The deficit shrank slightly, to around $35 billion, or a little more than one per cent of GDP.
‘Fiscal strength will wear off in the U.S.’
In the U.S., a very different picture emerged. Joe Biden’s administration posted a $1.695 trillion US budget deficit in fiscal 2023, a 23 per cent jump from the previous year.
All that spending is helping to keep economic growth numbers higher than they would normally have been. Porter says that sugar rush isn’t going to last.
“This fiscal strength will wear off in the U.S.” he said. “It’s actually going to become a bit of a drag over the next year, instead of adding to growth.”
He says the Biden administration introduced those budget initiatives in the hopes that the benefits of the fiscal spending would still be sloshing around the economy when Americans go to the polls in 2024.
But many forecasts show the U.S. economy could start to see a slowdown as early as the fourth quarter of this year.
“They probably peaked too soon on that front,” said Porter.
The diverging economic scenarios highlight the benefits and challenges to central banks on both sides of the border.
The burst of GDP in the U.S. has some wondering if the Federal Reserve will have to hold off on rate cuts, as it may make inflation even stickier than it already is.
In Canada, some expect rate cuts will come sooner. Desjardins’s forecast now shows the Bank of Canada cutting rates in the second half of next year, with the rate at 3.5 per cent by the end of 2024 and all the way down to 2.5 per cent the following year.
Start rowing in the same direction
Last week, Bank of Canada governor Tiff Macklem warned about the perils of government spending that could boost economic growth but also slow progress in the fight against inflation.
“It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” Macklem told reporters.
Tiff Macklem, governor of the Bank of Canada, said recent evidence shows higher interest rates are working to slow the economy. (Gavin John/Bloomberg)
Meanwhile, Jerome Powell, chair of the U.S. Federal Reserve, heralded the positive direction of the American economy as all that fiscal spending kicks in.
“Inflation has moderated since the middle of last year. Readings over the summer were quite favourable. But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said after the Fed announced it would leave rates unchanged.
But the divergence highlights political challenges.
The American economy is posting big gains now, but will likely slow as the presidential election season heats up over the next year.
The Canadian economy is flirting with a recession now, but is widely expected to pick up next year — perhaps in time for a federal election that could fall in 2025.
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
