How is That Trade War Going?

  

It is now well over a year since President Trump took office for the second time and began his tariff war on both Canada and the world.  Indeed, on his first day in office, Trump said that he expected “to put 25 percent tariffs on Canada and Mexico starting on Feb. 1, while declining to immediately flesh out plans for taxing Chinese imports.”  On February 1^st, 2025, Trump signed an executive order to impose tariffs on imports from Mexico, Canada and China with a 10 percent on all imports from China and 25 percent on imports from Mexico and Canada starting Feb. 4, 2025 justified by declaring a national emergency over undocumented immigration and drug trafficking.  Indeed, President Trump soon decreed that all the world should be taxed via tariffs with some unlikely targets.

Steel and aluminum tariffs were hiked on February 10^th and by March both Canada and Mexico retaliated with tariff measures of their own.  In the aftermath, there have been retreats and some moderation of tariffs with Canadian steel, autos and lumber remaining hit rather hard but overall the impacts on the Canadian economy have not been as dire as expected largely because 90 percent of Canadian trade with the United States remained tariff free under CUSMA. Indeed, some of the estimates of Canada’s economy shrinking were as high as 5.6 percent which did not come to pass in 2025.

So, one year down the road, how is the trade war affecting Canada and the United States?  This can be done via a comparison of some basic indicators with the indicators using data from both Statistics Canada and FRED. The obvious place to start is a look at how Canada’s merchandise trade has fared. Figure 1 plots the percentage change in Canadian merchandise trade with the United States and the World between 2024 and 2025.  With nearly three quarters of Canadian export trade occurring with the United States going into the trade war, it is not surprising that total Canadian merchandise exports are down but only by about one tenth of one percent. Meanwhile our total merchandise imports are up by 2.8 percent in 2025.  However, our exports to the United States are down 5.1 percent while our imports from the United States are also down 4.1 percent. What is more interesting is what has happened to the remainder of our trade – exports to the rest of the world are up 15.8 percent while imports are up 9.6 percent.  This suggests that 2025 did indeed see a measure of trade diversification away from the United States and towards the rest of the World.

 

However, there is still a way to go in terms of shifting trade away from the United States as Figures 2 and 3 illustrate.  Figure 2 looks at the distribution of Canadian merchandise exports while Figure 3 plots the distribution of merchandise imports.  The share of Canadian goods going to the United States has indeed declined going from nearly 80 percent in early 2025 to 69 percent by February of 2026.  Meanwhile, the share going to the rest of the World rose from 22 percent in January 2025 to nearly 32 percent by February 2026.  It remains to be seen if this performance merely reflects the picking of low hanging fruit and will level off or the trend will continue.  Meanwhile, the performance of imports was somewhat more abrupt.  Whereas prior to the trade war, there was an approximately 50/50 split between imports from the United States and the rest of the world, there was a sudden shift by March of 2025 with the US share dropping to 46 percent by February 2026 and the rest of the World climbing up to 54 percent. However, the gap after this sudden shift has remained relatively constant.

 

 

The Trump tariffs were sold to the American public as necessary to create jobs and particularly retain manufacturing jobs. Figure 4 looks at the percent change in total employment and manufacturing employment between January 2025 and January 2026.  During this period, Canada saw an increase in employment of 134,300 jobs – an increase in employment of 0.6 percent - though it shed 50,500 manufacturing jobs for a decrease in that sector of 2.6 percent.  Meanwhile, the United States saw an increase in total employment of 324,000 jobs or 0.2 percent and a 0.7 percent decline in manufacturing employment totalling 91,000 jobs.  For an economy ten times the size of the United States, one would have expected its total employment increase all things given to be about ten times that of Canada, but it is barely three-fold.  Moreover, its manufacturing sector has shed nearly twice the total number of jobs that Canada did though its percentage decline is substantially less.

 

When one looks at the unemployment rate between the two countries as shown in Figure 5, the traditional gap between US and Canadian unemployment rates continues but the Canadian unemployment rate essentially trended flat in 2025 starting at 6.7 percent in January 2025 and was still at 6.7 percent in February of 2026. Meanwhile over the same period, the Us unemployment rate rose from 4 percent to 4.3 percent.  Both countries have seen their unemployment rates decline from highs in mid 2025.

 

How about economic growth as measured by real GDP?  Well, the most interesting result displayed here in Figure 6 is that Canada saw its real GDP rise in 2025 rather than decline sharply as many had forecast displaying an unforeseen resilience.  Nevertheless, in 2025, Canada’s quarterly real GDP growth averaged 0.8 percent while that of the United States averaged 2 percent. Still, 0.8 percent growth is much better than a 5.6 percent decline. And as for the United States, it grew more slowly in 2025 than it did in either 2023 or 2024.

 

The reasons for Canada’s economy remaining as resilient are fourfold.  First, there has been a plethora of deficit spending at the provincial and federal government levels as well as efforts to prioritize government spending on Canadian producers. Second, 90 percent of Canadian trade with the United States remains tariff free under CUSMA and this will likely continue even after the deal is reviewed and re-negotiated given the United States is more dependent on trade with Canada and Mexico than the current federal administration is willing to publicly admit. Third, Canadian firms and business exporters are busily looking for new customers outside the United States while they are also looking for other import clients.  Fourth, Canadians themselves have responded by either shopping Canadian or looking for imported goods from elsewhere in their daily purchases and by making more of an effort to either spend their travel dollars domestically or anywhere but the United States.

The travel data is quite intriguing and presented in Figure 7 and 8. When monthly vehicles entering Canada are examined, Canadian vehicles re-entering Canada from the United States have shown a noticeable declining trend while Americans entering Canada are trending flat. Yet, in 2024, 8.4 million American crossed into Canada whereas in 2025 the total was 8.1 million for a decline of 3.7 percent.  As for Canadians, they continue to visit the United States at a much higher rate than Americans visit Canada – as they always have – but in 2024 there were 19.3 million vehicle re-entries and in 2025 there were 16.3 million – a decline of about 15.6 percent.  Needless to say, the impact on American border communities from the decline in Canadian shoppers and travellers has had a multi-billion dollar negative effect.

 

 

Figure 8 looks at air travel and here the numbers also show a shift in Canadian travel both by Canadians as well as the rest of the world with respect to Canada.  In 2025, Canadians returning to Canada by air from the United States was down nearly 14 percent while Canadians returning by air to Canada from the rest of the World was up nearly 17 percent.  Meanwhile, Americans entering Canada by air in 2025 was up nearly 6 percent while entry by non-Americans was up nearly 10 percent.  Between more Canadians staying home and more American and other international visitors coming to Canada, the Canadian tourism and hospitality industry has had a banner year with benefits to the economy and employment.

So, where does this leave us?  After one year of the Canada-US trade dispute, the sky has not fallen but there are noticeable effects.  Both countries are worse off in that their economic and employment growth could be better.  More to the point, President's Trump's claims that he is making America great again are falling somewhat short.  And while Canada has taken some steps to diversify its trade and business activities away from the United States, it stands that Canada is still heavily reliant on the US economy.  Still, it is remarkable that the share of Canadian merchandise exports going to the United States has fallen below 70 percent which  is the lowest it has been in twenty years. While our exports to the United States are down, so are our imports from them, and given that for many American states their largest trade partner is Canada, this is undoubtedly a contributor to their slower employment and GDP growth. 

What will 2026 bring?  Good question.  CUSMA will likely be retained in some form even if it involves separate bilateral pacts between Canada and Mexico with the United States as the current administration is hinting. However, the efforts at Canadian diversification away from the United States will continue given the increasingly erratic state of world economic and political affairs though the rate of diversification will be slow and incremental.  The United States will remain Canada’s largest trade partner but with our export share with the Americans falling below 70 percent and imports below 50 percent in just one year, it is apparent that Canada can generate new economic opportunities that do not involve the United States.  However, the pace is slow and a good economic trading relationship with the United States remains important. Completely reversing fifty years of economic integration is not going to happen overnight nor should it given the traditional links between two countries that share the North American continent. Still, going forward, things will  be different and new patterns of travel and consumption once established will persist to some extent.

Port Activity Will Help Stabilize Thunder Bay's Economy in 2026

  

Despite the snow on the ground, spring has arrived at the Port of Thunder Bay and that means two things.  First, the arrival of the first vessel with the  MV Kathy McKeil passing the breakwall at on March 26.  Second, there is the annual Opening of Navigation Luncheon which will take place this year on April 8^th at the Italian Cultural Centre in Thunder Bay. These annual events always remind us of the importance of the Port of Thunder Bay, not only in the past when the twin ports of Port Arthur and Fort William were the largest grain port in the world but at present given the revitalization of the port’s activity since 2000 and especially over the last decade.  As of 2024, the Port provided approximately 1,000 direct jobs and an annual economic impact of $370 million.

It bears looking at some of the recent trends in the main cargo that passes through the port. Figure 1 presents a plot of total tonnage through the port since 2000 along with a LOWESS smooth to isolate the trends and there has been a pronounced upward trend since 2010 with an average annual growth rate in total tonnage of 1.3 percent annually since 2000 and 3.3 percent since 2010.  In 2025, total tonnage through the Port of Thunder Bay was 10.8 million tonnes. 

 

Of course, the main commodity remains grain accounting in 2025 for 84 percent of total tonnage shipped. Figure 2 presents grain tonnage through the port since 2000 and again with the trend shows an increase after 2010 with a plateauing from about 2016 to 2020 and then another surge bringing total grain tonnage shipped in 2025 to almost 9 million tonnes. From 2000 to 2025, grain tonnage shipped has grown at an annual rate of 1.9 percent but since 2010 the growth rate averaged 4.1 percent annually. Figures 3 and 4 repeat the plots for potash and dry bulk. Since 2000, potash shipments in tonnes have grown at an annual rate of 9.6 percent but since 2010 the growth rate has been 20 percent. Meanwhile, dry bulk since 2000 grew at an annual rate of 7.1 percent with the period since 2010 seeing annual growth of 5.7 percent.  

 

 

With the renewed emphasis on east-west trade within Canada along with the disruption in world markets and shipping as a result the ongoing wars in the crucial cross-roads of the Middle East, one expects the demand for Canadian resource products as well as shipments through Thunder Bay to increase in 2026.  This will be a boon to the Thunder Bay economy and a counterweight to the forecasts of tepid growth in 2026 from Signal49 research.The Port of Thunder Bay remains an important component of local and regional economic activity.

Northwest Resilience and Growth

  

The Northwestern Ontario Municipal Association (NOMA) will be meeting April 22^nd to 24^th for its 2026 conference and annual general meeting in Thunder Bay, under the theme “Resilience.” After the winter we have had, resilience is an apt theme though one suspects the choice of theme pertains to the economy and municipal finances rather than the weather and the gauntlet that has become the region’s highways. Economic resilience is especially important these days and it is important to note that the economy in Northwestern Ontario has been doing rather well over the last few years if one is to take labour force data at face value.

It has been an era not of decline or stagnation but of growth with that growth occurring both in the region’s dominant metropolis of Thunder Bay but also outside of it.  Indeed, there has been a noticeable improvement in one of the key indicators at least from the general public’s perspective – the unemployment rate.  From highs of 8 percent in the wake of the Great Recession and Forest Sector Crisis, the unemployment rate in Northwestern Ontario in 2025 stood at 4.6 percent compared to over 6 percent for Canada and over 7 percent for Ontario.  Using data from Statistics Canada, a more detailed portrait of improvement emerges. 

 

Figure 1 plots three labour market indicators for Northwestern Ontario comparing 2015 with 2025.  Between these two years, the population aged 15 years and over grew from 173,400 to 184,200. The labour force grew from 104,700 to 112,500 and employment grew from 98,400 to 107,300.  Of course, it is worth looking at the data in terms of the Thunder Bay CMA and the rest of the region given that Thunder Bay CMA accounts for about 60 percent of both the population and employment of the entire region.  

 

Figure 2 repeats the indicators for the Thunder Bay and adds Full Time(FT) and Part Time (PT) Employment.  Thunder Bay’s population aged 15 years and over increased by 7,400 between 2015 and 2025.  This was accompanied by labour force growth also of 7,400 individuals and employment growth again of 7,400 with FT employment growing by 8,100 while PT Employment declined by 700 jobs.  The good news here is that this employment creation was overwhelming FT employment, and this pattern repeats itself outside of Thunder Bay.   Figure 3 shows that for the rest of Northwest Ontario outside of Thunder Bay, the population aged 15 years and over grew by 3,400 with the labour force growing by 400 and employment growing by 1500.  FT employment in the region outside Thunder Bay grew by 1,800 while PT employment also declined by 300 jobs.  

 

Figure 4 compares percent growth in these indicators across Thunder Bay and the Rest of Northwest Ontario.  Between 2015 and 2025, population aged 15 and over grew 7 percent in Thunder Bay and 5 percent in the rest of the region.  The labour force grew nearly 12 percent in Thunder Bay but only 1 percent in the rest of the region.  Meanwhile, employment grew 12.5 percent in Thunder Bay and 3.8 percent in the rest of the region.  Full time employment grew impressively by nearly 18 percent in Thunder Bay and almost 6 percent outside of Thunder Bay.  Part time employment declined more in Thunder Bay at -5 percent as opposed to about -4 percent outside of Thunder Bay.

 

Figure 5 illustrates the annual unemployment rates in Thunder Bay and the outside region.  Both have declined over time with the decline somewhat sharper in the region outside of Thunder Bay.  That is because the labour force has expanded more rapidly in Thunder Bay relative to the rest of the region as Thunder Bay has attracted more population growth.  Nonetheless, a rising tide appears to have lifted all boats and the improvement in full time employment is especially welcome.

 

What has been driving these improvements?  The construction work both in Thunder Bay and the region whether on the electricity grid or highway improvement has been a factor.  Thunder Bay can add housing and hotel construction to this set of projects not to mention a billion-dollar correctional facility. Then there is mining development which continues to generate employment and activity.  Of course, the region also benefits from a large public sector and quasi-public sector particularly in the health, social assistance and indigenous economic sectors which has also been a factor in employment growth nationwide.  All these sectors in Northwest Ontario have been relatively well sheltered from the ongoing tariff dispute with the United States.  While the Northwest has not escaped unscathed from recent employment losses, it remains that much of the fallout has hit the manufacturing sector in southern Ontario.

So, regional municipal delegates and leaders will have a lot to celebrate at this year’s NOMA Meetings. Indeed, this growth should also be reflected in growing municipal tax bases which will afford additional revenue.  Yet, it is not time to rest on laurels given that the economy both nationally and globally remains turbulent and uncertain.  Hopefully the region will be able to capitalize both on critical minerals mining as well as the growth in defense related spending.

Ontario’s 2026 Budget: Facing Economic Challenges

  

Ontario's Premier Ford seems to have grown more theatrical over time in his public pronouncements whether of the economic nature or otherwise.  There is also a preoccupation with the announcement of large infrastructure initiatives with many targeted to the GTA area the latest of which is the move to extend the runways at Billy Bishop Airport to accommodate jets.  This is all understandable given the buffeting that the Ontario economy has taken in the wake of the Trump Tariffs and the effect on Ontario exports and the auto sector in particular and the rising unhappiness and dissatisfaction of the Ontario public.  And yet, despite diversionary theatrics and announcements, the challenges facing Ontario are not going away.

There are numerous challenges facing Ontario as Thursday’s budget approaches and they can be divided into short and long term.  On the immediate front, Ontario has seen a decline in employment and a rise in unemployment rates because of the continuing fall out from the trade and tariff dispute with the United States.  There is the continuing challenge of health care as families have difficulty accessing timely physician and hospital services.   And of course there is the cost of housing which has not been helped by Ontario’s inability to boost housing starts which as one report has noted is an Ontario rather than Canadian problem per se.  Then there are the public finances which in the short term have seen continued deficits and despite pledges that the budget will be balanced by 2027, is looking increasingly unlikely.  Over the longer term, Ontario faces a productivity problem best illustrated by real per capita GDP which is essentially unchanged from 2018 and a net debt problem which the province’s Financial Accountability Office estimates will reach $548 billion by 2029-30.

 

 

The best way to summarize the economic challenges facing Ontario is through a few charts.  Figure 1 starts off with a long-term view of Ontario’s real per capita GDP and the growth rates over time.  The takeaway here is that over the long run, the growth rate of real per capita GDP has trended downwards.  More serious from the Ontario Premier’s point of view, real per capita GDP in Ontario has essentially been stagnant since 2019.  In that year, real per capita GDP ($2017) was $59,681 and in 2025 it was $60,052.  If one factors out the pandemic drop and rebound of 2020 and 2021 – real per capita GDP in Ontario since 2018 has grown at 0.4 percent annually. It’s 0.3 percent annually if you factor in the two pandemic years.  Ontario is essentially amidst a lost decade in terms of per person income growth – it just has not been labelled that yet given that Ontario is also amidst a lost decade when it comes to an effective political opposition.

 

 

The slowing of the Ontario economy has been especially noticeable in rising rates of unemployment and those rates while up across the province, have been quite noticeable in the GTA where half of Ontario’s population and employment resides. Figure 2 plots the monthly unemployment rate sin Ontario for the province and by economic region since 2016.  Again, taking away the pandemic spike, they were on the decline until early 2023 and have since started to rise.  In the GTA, the unemployment rate was just over 5 percent in early 2023 and rose to reach 9.5 percent by September of 2025.  It has since subsided a bit but is still at 7.6 percent.  That is the third highest rate of Ontario’s 11 economic regions as illustrated in Figure 3.  Having many unhappy voters concentrated in such a large vote rich area is not good news. 

 

 

The deteriorating employment situation is further illustrated in Figure 4 which plots the change in employment for Ontario and its 11 economic regions both over the course of the last 12 months – February 2025 to February 2026 and more recently since July 2025. While Ontario since February 2025 is only down 7400 jobs, if you look at where employment has gone from the summer peak, the drop has been about 150,000 jobs.  The largest drops in absolute numbers have been Ottawa (-46,400), Toronto (-24,600), Kitchener-Waterloo-Barrie (-40,600) and Hamilton-Niagara (-37,300).  

 

 

So, come Thursday, many Ontarians will be looking at what the government might do to alleviate the economic hardship that is afflicting Ontario.  Will there be long run measures to boost productivity and the supply side of the economy that ultimately will raise incomes, and reduce unemployment and inflation, or will Ontario continue with short term measures that grab political attention or temporarily alleviate cost of living through demand side boosts that boost inflation further. Stay tuned.

When Will Highway 1 Through Northwestern Ontario Be Fixed?

  

It has been a grim start to 2026 on the roads and highways of Northwestern Ontario with 11 deaths recorded so far,aggravated in part by the harsh winter conditions we have experienced this year.  This has once again prompted regional leaders to call for improvements to the 11 and 17 highway corridors with either more four-laning or a two plus one system (a three-lane highway configuration where the middle lane changes direction every two to five kilometres for passing).  The bottleneck at the Nipigon bridge is especially problematic given that both highways converge at that point.  Of course, the stretch between Nipigon and Shabaqua has gradually been widened to four lanes in spots, but the process has been underway for over twenty years, and substantial portions remain to be completed. 

On top of that, the amount of traffic has increased substantially particularly with respect to transport trucks.  The increase in traffic comes with demographic changes as older drivers have been retiring and it seems there is a plethora of new drivers with a lot less experience driving two lane highways.  Traffic is only going to increase given that east-west traffic appears to have increased in the wake of American tariffs and to that can be added a future where nuclear waste shipments will be trucked to Ignace which is going to be the designated nuclear waste repository for all of Canada.

Of course, the call for highway improvements in the region has been as ubiquitous and lonely as the haunting calls of the loon.  Annual meetings of NOMA and other regional gatherings invariably issue a call for highway improvements with the case for what is perceived by many in the region to be a piece of critical national infrastructure falling on deaf ears. And there have been opinion pieces and reports often in national venues making the case for an improved national highway system through northern Ontario but again they seem to have been only of limited impact.  Even the Rosehart Report in 2008 noted that “For at least three decades, the residents of Northwestern Ontario have requested four-laning of the main highway from the Manitoba border to Southern Ontario (Highway 17)” which means that really this has been going on for half a century and yet here we are.

Northwestern Ontario is a vital zone of transit between the east and west of Canada and the case can certainly be made that as part of a resilient national economy and defense strategy, the highways through the region need to be improved.  There is even a case for an extension of Highway 11 over the top of Lake Nipigon to provide as second east-west route independent of the bottleneck at Nipigon.  However, the case for public safety is also an important one and for that one needs top look at the historical record of road and traffic fatalities in Ontario over time as well as a comparison of Northwestern Ontario with the rest of the province.

Figure 1 plots the number of persons injured and persons killed per 100,000 population for all of Ontario from 1931 to 2024 using data obtained from Ontario Road Safety Annual Reports – which incidentally are only preliminary after 2022 and do not offer as detailed a look as previous reports. Nevertheless, the chart shows that there used to be a time when Ontario was smaller in population and yet highway and road carnage was rather high.   

 

Road deaths per 100,000 population were 17 per 100,000 in 1931 and trended upwards to peak in the early 1970s at 24 deaths per 100,000 population.  They then trended downwards because of improvements in automobile safety as well as the passage of seat belt laws in 1976 and 2006.  Despite the increase in Ontario population and higher urban and road use densities, by 2012, motor vehicle deaths per 100,00 population in Ontario bottomed out at about 4 per 100,000 and have remained stable since.

 

Compare now Northwestern Ontario statistics for Kenora, Rainy River and Thunder Bay districts over the last decade with Ontario.  Figure 2 plots motor vehicle collision deaths per 100,000 population for Northwestern Ontario versus Ontario from 2015 to 2024.  The average for the 2015 to 2024 period is 11.3 deaths per 100,000 for Northwestern Ontario versus 4 deaths per 100,000 for Ontario as a whole.  Moreover, while the Ontario numbers have remained largely stable over the period, the ones in Northwestern Ontario exhibit a distinct upward trend when a linear fit is applied.  In other words, things are getting worse. 

 

The deaths in Northwestern Ontario over the 2015 to 2024 period have ranged from a low of 7.8 deaths per 100,000 population in 2016 to a high of 13.8 in 2021.  As for 2026, if deaths continue at the current rate, there could well be 40 deaths this year or about 16 per 100,000 population.  Going back in time for Ontario, the last time there were approximately 16 traffic collision deaths per 100,000 population in Ontario was 1981 – that was nearly half a century ago. Or if you like, Northwestern Ontario road and highway death rates in 2026 will be akin to Ontario in the 1930s. 

So again, we again ask the question.  When will Highway No. 1 through Northwestern Ontario be fixed?  Will we have an answer before 2076?

Takeaways from the US-Iran Conflict

  

It has now been nearly two weeks since the Americans began bombing Iran to bring about its desired regime change. As this mid-East conflict continues and expands, the economic, trade and travel disruption continues and if prolonged threatens to slow economic growth substantially and restoke inflation.  While all of this is serious in its own right, there are several takeaways that spring to mind because of what has transpired.

1.        Despite the post-pandemic talk of building national resilience and hardening supply chains, the global economy is obviously still quite interdependent, and the crucial lubricant is oil.  Indeed, despite the development of green energy alternatives, it would appear it that the world still runs on oil. As late as 2023, fossil fuels still comprised over 80 percent of the world’s energy mix and 20 percent of global oil consumption and the LNG trade goes through the now precarious Strait of Hormuz.  The countries most dependent on this flow include Japan, India, South Korea and China.  China is the most dependent on Middle East oil and  imports about 40 percent of its oil through the strait.  This leads one to speculate that the American intervention in Iran is seeking to hit two birds with one stone so to speak – taking out Iran while also sticking it to China.  On the other hand, this assumes the United States went into this with a strategy.  See next point.

2.        The current American leadership can generate policy ideas but seldom seem to be capable of thinking things through before action. It appears it did not anticipate that after decapitating the Iranian leadership, they would continue fighting.  Iran is not Venezuela and it is apparent that the thinking was to launch a quick strike to decapitate the regime through shock and awe and that it would naturally be followed by a rising up of the people and a new regime allowing President Trump to declare victory and depart.  It has turned out to be more complicated than that.  Indeed, no lessons were learned from the Ukraine which when initially invaded by Russia was expected to collapse quickly under the Russian onslaught, but it turns out they did not.   In addition, the attack on Iran represents yet another direct attempt to take out a foreign leader by the United States and is setting precedents that no doubt might disturb other world leaders – foes and allies alike.  One wonders if other countries may be inspired to deal with certain issues in this revamped American style. This would represent an important deterioration in international rules of etiquette with the next step up being knocking off international leaders at state dinners a la Medici or Borgia or perhaps even like the Black Dinner of 1440.  While the principles of the post 1648 Westphalian System regarding exclusive territorial sovereignty have been in retreat for some time, going back to a more medieval approach does not seem like progress to me.  In any event, while the United States in its history has tried to bring about regime changes around the world, the Americans need to reflect on where exactly they are going with this specific approach to international relations because the long run cycle of history suggests that what goes around eventually comes around.

3.       Despite all the talk of the rise of China and the declines of the West and the United States, the United States, with its string of global bases and aircraft carrier groups, is still able to project its power around the world in a way that China and Russia are not capable of.  While China has now acquired its third aircraft carrier and reports are that the number of ships the Chinese Navy has exceeds that of the U.S. Navy, the tonnage of the U.S. Navy is still substantially larger than China’s and it has more long-range vessels.  Most of China’s ships are still short-range patrol and coastal vessels which may be useful if they wish to invade Taiwan but not so much so when it comes to dispatching task forces to the other side of the globe. The U.S. Navy has more destroyers and frigates and 11 aircraft carriers. Their action in the Persian Gulf is only using a fraction of the fleet. America still rules the waves.

4.     Despite its written and living Constitution and several centuries of history, the Americans do not have a system of checks and balances after all. While there has been a long-term increase in the power of the American Presidency since World War II, under Donald Trump, the Imperial Presidency has reached new unabashed heights.  In the case of trade, Trump’s tariffs were struck down by the Supreme Court, but the President has already said that he will find a new way to carry out his plan and bypass Congress. And, in the recent action against Iran which amounts to a declaration of war against Iran, well according to the Constitution of the United States and the observations of the U.S. Supreme Court, only Congress has the power to declare war.  If this was the Star Wars universe, one might say  that Chancellor Palpatine has essentially declared himself emperor and ended the Republic. This however is reality and therefore much more serious if indeed the case.

5.      Finally, we come to realize that Canada’s failure to put more pipeline infrastructure in place or improve its national defences is even more glaring considering what has happened to world energy markets.  Ramping up oil production and export pipelines now as a better late than never strategy may not be enough given the length of time it takes to put the infrastructure in place.  We have probably made the same mistake with respect to our ramping up of defence spending as the arrival of new ships, submarines and jet fighters is still years away even if decisions are made today.  Indeed, we have still yet to decide who will build our new submarines or our new jets.  Pandemic notwithstanding, we spent the last decade ramping up the federal footprint largely in areas of income and social transfers. We have been caught with our pants down in so many ways and despite Prime Minister Carney’s flurry of travel activity to move us foreword on trade and defence, we are still moving slowly when it comes to getting things done.  God help us all.

 

 

How Overvalued is the Stock Market?

  

Stock markets have been taking a beating over the last week or so because of the war in the Middle East involving Iran and the United States and the TSX has been no exception.  Naturally, anyone with investments in the markets is concerned and wondering if markets are going to fall dramatically further.  For Canadian markets, a lot hinges on the degree of uncertainty being generated by both the Middle East conflict as well as the U.S. Supreme Court ruling on the legality of President Trump’s tariffs. Markets have already fallen quite a bit due to the broadening of the Iranian conflict, and the price of oil and other commodities has risen.  With respect to assorted fund managers as well as pension funds and RRSPs, it depends on how many of the investments are tied to the Middle East region and the degree of exposure in terms of the proportion of investments held in affected sectors. 

The rise in oil prices if sustained could trigger a new burst of inflation and higher interest rates which in turn would further depress stock markets. A lot depends on how long the conflict lasts but the degree of uncertainty is high - making things worse for markets - because it is unclear what long-term plan is for Iran and the Middle East by the Americans.  As for the Supreme Court ruling, it is a positive development that suggests that the days of tariffs on Canadian American trade flows may be numbered but again it depends on what the President's response is in terms of finding new ways to levy barriers to trade.

Yet, these are all short-term factors and the long-term trends in stock market valuations also need to be figured into the equation.  This is done with a regression using STATA in which the TSX was regressed on a monthly time variable with num1 equal to January 1956 and num843 equal to March 2026 with the March value being the end of the first week only. Figure 1 presents the monthly closing value of the TSX from 1956 to 2026.  Viewed over the long run, stock markets do trend up though closer examination suggests that the last three years represent a particularly exuberant upward trend. From January 2023 to January 2026, the TSX monthly closing valuation has risen from 20,767 to 31,924 – representing an increase of just over 50 percent which is quite astounding.   

 

Figure 2 presents the same data but with linear and 2^nd order polynomial fits and they suggest that the last three years are well out of the long-term trend of the TSX at least as measured by these two regressions. The linear fit suggests that the TSX should currently be at about 17,400 while the polynomial fit suggests it should be at 23,000.  Both estimated valuations are based on rather crude simple regression techniques but are substantially lower than what we are currently at. 

 

 

The polynomial fit closely tracks the data until 2024 when it falls quite below but with an r-squared of 96 percent, it does much better than the linear fit which with an r-squared of 82 percent starts to diverge substantially circa 2020 – also the year the pandemic started. The post 2020 era in general has been a rather severe break with what has gone before in many aspects of economic and social life.  One could assume that post 2020 we are in a brave new world when it comes to stock market valuations and economic performance and “this time is different” when it comes to the recent surges in the stock market. We need not worry.  It is onwards and upwards! On the other hand, if one believes that these regressions somehow capture the fundamentals of long-term performance, then we are in a very fragile market situation, and the recent declines may only be the tip of the iceberg.  We are in interesting times.

Thunder Bay's Evolving Waterfront

  

It was recently reported that another portion of the former CNR waterfront iron ore trestle will soon be coming down to make room for an expansion for Midcontinent Terminals cargo shipping facilities. The economic benefits of expanding port activity in terms of additional cargo and job creation notwithstanding, there is a certain amount of wistfulness associated with watching the grand structure shrink further.  True, it can be seen as a barrier and an eyesore, but it also represents a rather impressive structure built during an era where it seems Canada was still capable of quickly building large, impressive structures as part of its industrial development.  

Designed by C.D. Howe’s engineering firm, the trestle was built at the end of World War II to ship iron ore by rail out of the Steep Rock Mine at Atikokan and the end of the mine along with signalling the decline of Atikokan also ended the need for the trestle. Of course, the right of way and run up to the main dock facilities are long gone but the remnants are still quite impressive in terms of their sheer size especially when one is out in the harbour and sailing by.  A number of years ago, had the pleasure of a harbour boat tour with friends and took some pictures of the trestle. Enjoy.

 

 

 

 

 

 

 

BC and Toronto Economy Studies Released

Ontario is not the only Canadian province that has been buffeted by lacklustre economic performance in recent years.  Two studies released by the Fraser Institute today highlight both Ontario and British Columbia.  The Ontario study by Nathaniel Li and Ben Eisen focuses on Toronto and its role as both Ontario and Canada's economic engine.  The other study and accompanying commentary which I have authored looks at British Columbia's economic performance within the context of whether or not BC is headed towards another "lost decade" akin to the performance of the 1990s. See below for the commentary which appears on the Fraser Institute web site with a link to the study itself. 

Study and accompanying commentary on the British Columbia economy recently released by the Fraser Institute.

Commentary

February 12, 2026

B.C. government faces another ‘lost decade’ unless it pivots to pro-growth policies

By: Livio Di Matteo

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With its inviting climate and magnificent natural setting, British Columbia has long attracted residents. The province’s robust population growth rates, historically above the national average, have been seen as a signal of economic opportunity and success.

However, in recent years, economic growth per person—an important measure of living standards—has stagnated (after adjusting for inflation). In 2025, more British Columbians left the province than moved to it, with a population decline for the first time on record. While B.C. maintains a relatively successful economy with per-person income at or above the Canadian average, it faces numerous economic challenges. In its upcoming February budget, the Eby government should prioritize economic growth.

Again, B.C. has traditionally been among the more prosperous Canadian provinces, but the 1990s and the early 2020s stand out as particularly poor economic periods based on per-person economic growth (inflation-adjusted). The 1990s were known as a “lost decade” in B.C., with per-person economic growth averaging barely one-fifth of one per cent annually (again, after adjusting for inflation).

The spectre of a lost decade has again reared its head as the 2020s have seen per-person economic growth (inflation-adjusted) averaging 0.4 per cent (for perspective, it’s been as high as 1.7 per cent in the 2000s). There are several economic factors driving the slowing growth rate. Critical is the role of business investment. In B.C., gross fixed capital formation in machinery and equipment (as a share of the economy) has declined sharply, from a peak of 28.2 per cent in 1998 to 10.2 per cent by 2023. Moreover, much economic activity in the province is still tied to residential construction and real estate, and while these sectors support many jobs, they’re not at the heart of building a productive, globally competitive economy.

Exports are a key driver of prosperity in a small open economy such as B.C., but as a share of the provincial economy, total exports peaked at 48.1 per cent in 2000 and then declined, reaching 37.5 per cent by 2023. The average annual growth of inflation-adjusted per-person exports was highest in the 2010s at 2.1 per cent, but the 2020s to date has only seen 0.6 per cent average annual growth. These findings point to a significant decline in the strength and dynamism of B.C.’s export base.

Of course, many will argue that despite these trends, employment growth has been quite respectable. However, much of that growth reflects an expanding government sector, with its employment growing by an average of 5.5 per cent annually since 2020, while private-sector employment has grown at just 1.3 per cent annually and self-employment has declined outright. Private-sector employment (including self-employment) is critical to generating the wealth for achieving higher living standards, and the brisk expansion of B.C.’s government-sector employment has come with burgeoning deficits and skyrocketing government debt—pointing to the likelihood of higher taxes down the road.

This is not a recipe for healthy economic growth and is again reminiscent of the 1990s, which saw 10 consecutive provincial government deficits. The B.C. government is projected to run deficits until at least 2027/28, with provincial net debt rising from $71.3 billion in 2023/24 to $155.8 billion by 2027/28. The net debt-to-GDP ratio—an important measure of the sustainability of debt—is in turn projected to rise over this period from 17.4 per cent to 32.4 per cent, indicating a rapidly deteriorating fiscal position.

Halfway through the 2020s, one can argue that the decade is not yet a lost one for B.C., but the recent trends are discouraging. With weak growth in inflation-adjusted per-person economic growth, a decline in important components of business investment, a weakened export sector, dismal private-sector employment growth, and record budget deficits, it’s time for the Eby government to focus on pro-growth policies in its upcoming budget. Otherwise, British Columbians may indeed face another lost decade.