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 – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
