Can Donald Trump revive Canada’s ailing economy?

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Canadian economists believe there could be an unusual solution to the problems plaguing the G7 economies: Donald Trump’s return to the White House.

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The president-elect of the United States may have threatened a 25 percent tariff on all exports from his northern neighbor and played a role in the resignation of finance minister Chrystia Freeland this month.

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But some say Trump’s second term is the impetus Canada needs to address a backlog of structural problems that have left it trailing the US in productivity, growth and wages.

William Foster, senior vice president of the independent risk group at Moody’s, said Trump’s “stress test” was an opportunity to refocus Canada’s economy. “It has the resources, it just needs to be found,” Foster said.

Socio-economic indicators across Canada show that large sections of the population are still being left behind.

In March 2024, there were more than two million food bank visits in Canada – the highest number in history – a six percent increase compared to 2023, and a 90 percent increase compared to 2019, according to the NGO Food Banks Canada.

Unemployment is rising, at nearly seven percent, and Canada’s household debt is the highest in the G7, making the population more vulnerable to recession.

Weak productivity, along with exchange rate movements, means Canadian wages and salaries are still lower than those in all 50 US states, according to an October report by the Fraser Institute, a Vancouver-based think tank.

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Robert Asselin, a former government adviser who is now with the Business Council of Canada, said the country’s economy is “structurally weak” as it relies heavily on consumption and real estate.

Last week, when announcing another interest rate cut, Bank of Canada governor Tiff Macklem said there are “mixed signs in the data”, adding population growth and public sector spending are keeping Canada’s GDP growing.

Inflation is now within Canada’s two per cent target — down from seven per cent in 2022 — but when Freeland resigned, on the day he was due to present the Fall Economic Statement, an Angus Reid Institute (ARI) survey found it was 38. Canadians say their situation is worse than it was 12 months ago.

“This is the lowest rate since 2021 but is significantly higher than the data seen in ARI’s 14 years of tracking that data,” pollsters said.

Alex Whalen, policy director at the Fraser Institute, said Canada’s problems stemmed from an “investment crisis”.

“We need to rein in government spending, increase tax reform and an improved investment climate that begins, among other policies, with the reversal of the recent capital gains tax hike, greater gains in asset sales, and an immediate end to depreciation,” he said.

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Productivity and innovation – two pillars that have helped the US economy compete ahead of its G7 counterparts in recent years – have become a sore point in Canada.

“A new, productive and competitive economy will lead to higher wages and better job opportunities for Canadian workers,” Asselin said.

Canada was the 18th most productive economy in the Organization for Economic Co-operation and Development in 2022; in 1970 it was the sixth. This year, labor productivity was 1.2 percent below pre-pandemic levels, down 14 of the last 16 quarters.

Jonathan Garbutt, a Toronto-based tax lawyer, said that despite large government funding for research and development, Canada has not fostered a competitive and technological sector.

“When young Canadian entrepreneurs ask me for my best tax advice, I say, go somewhere down south that promotes entrepreneurship and rewards people for taking risks,” he said.

While the US’s stellar growth may be the envy of Canada, the country has benefited from a century-old trade relationship with its neighbor to the south worth about $1.3 trillion a year.

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About 80 percent of Canada’s exports flow to the United States, with the automotive industry, oil and gas, steel and precious minerals such as uranium central to the relationship.

If Trump carries out his threat to destroy the North American Free Trade Agreement, the USMCA, with Canada and Mexico when he returns to office on January 20, it will take away the remaining strength of the Canadian economy and possibly cause an economic collapse. .

Differences between Freeland and Prime Minister Justin Trudeau over how to respond to what the former minister described as Trump’s “aggressive economic nationalism” led to his resignation after four years in the post.

His resignation letter criticized a number of Trudeau’s pre-election gifts – including tax-free Christmas trees and a proposed $250 check for nearly half the population – at a time when Ottawa is “facing a serious challenge” from the US president-elect.

The election must be held in October and the leader of the opposition Conservative Party, Pierre Poilievre, is far ahead in the polls.

Using slogans such as “tax axe”, Poilievre, a 45-year-old politician, has targeted Trudeau in 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 at Wellington-Altus Private Wealth.

“We’re seeing the worst recession in the Canadian economy since WWII and Ottawa and Bay Street haven’t seen the full extent of the rapid decline.”

© 2024 The Financial Times Ltd

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