Canada: Economic Outlook for 2026

 

It is that time of the year and every good economist should offer their thoughts for the coming year’s economic performance.  However, forecasting the outlook for Canada’s economy in 2026 is ultimately an exercise in caution given the large number of domestic and international economic moving parts.  The trade and tariff situation between Canada and the United States including the future of CUSMA is an important variable as is the large number of proposed infrastructure and nation building projects and increased defence spending all which are sources of stimulus.  Then there are the efforts at export diversification and the role of prices for Canadian resource commodities. At the same time inflation and economic uncertainty may dampen consumer confidence and spending along with the headwinds of flat home construction and population growth which have been major drivers at least in terms of overall though not per capita economic growth.

A worst-case scenario would see CUSMA falling apart and a new set of higher tariffs shocking the Canadian economy and prompting capital outflow.  New tariffs would further depress exports.  If planned national infrastructure projects are bogged down, then that source of stimulus would not be there.  The economy would likely enter a recession with the loss of several hundred thousand jobs and the unemployment rate rising to the 8-9 percent range though inflation would likely moderate to below the 2 percent target.  On the plus side, lower inflation would result in downward movement of the Bank of Canada Overnight Rate to below 2 percent. 

Real GDP growth in this worst-case scenario would be negative but hopefully not catastrophic given the large amount of fiscal stabilization government spending is already injecting into the economy and the self-directed efforts by more Canadians to spend and travel domestically.  However, the Canadian political situation could be a factor in further making a worst-scenario case worse if the minority government falls plunging the country into the uncertainty of a federal election and both Alberta and Quebec announce they are going to hold referendums on separation leading to additional outflows of capital and investment.

However, there are reasons to be optimistic that 2026 will be at least as good as 2025 if not better.  Indeed, the recent update of GDP growth numbers by Statistics Canada suggests the Canadian economy has more steam than one might expect.   In the face of trade disruption and uncertainty, Canada’s economy in 2025 has been more resilient than one initially might have thought. High government spending for the time being is already injecting stimulus into the economy and the self-directed efforts by more Canadians to spend and travel domestically has been its own domestic stimulus program.  In the end, while there has been an impact of U.S. tariffs on specific Canadian sectors such as autos, steel and aluminum, it remains that most Canadian trade with the United States that is under CUSMA remains tariff free.

Going forward, despite President Trump’s rhetoric, the United States does need Canadian exports and there is eventually going to be some type of trade agreement that will ensure reasonable access to the American market.  If all goes well in terms of resolving trade issues with the United States, there is no major international crisis that disrupts trade, there is a start on one or two major infrastructure projects, some stimulus from defence spending, continued export diversification and commodity prices strengthen, then one might even see robust real GDP growth in the 2-3 percent range with the unemployment rate falling to the 5-6 percent range as hundreds of thousands of new jobs are added to the economy.   Indeed, faster than expected growth may put inflation well above the Bank of Canada target range resulting in higher interest rates and even a higher exchange rate relative to the U.S. dollar.

So, economic outcomes in 2026 are uncertain but the evidence suggests that when push comes to shove, the U.S. will have to negotiate some type of arrangement with Canada and Mexico if it does not want to harm its own economic welfare.  Even a cross between the best- and worst-case scenarios outlined here would be a reasonable economic outcome in terms of growth and employment.   I think guarded economic optimism is a good way to sail into the New Year. 

 

 

Measuring the Trump Travel Effect

 

Travel by Canadians to the United States has undergone a significant decline in 2025 while other international travel both to and from Canada is up.  According to recent numbers released by Statistics Canada, when it comes to air travel, “In October 2025, 1.3 million passengers were screened for international flights (outside the United States), up sharply compared with one year earlier (+12.0%). Moreover, international passenger traffic was significantly higher in October 2025 (+20.4%) than the pre-pandemic level posted in October 2019. Conversely, transborder passenger traffic (to the United States) in October 2025 decreased year over year for the ninth consecutive month, down 8.9% to 1.2 million, and was 5.7% below the October 2019 level.” Land traffic is also down especially when it comes to the annual snow bird migration to warmer parts of the United States and is expected to continue falling. Moreover, the decline has received substantial international media attention given that it represents a remarkable reversal in the perceived travel relationship between the two countries.

The question that inevitably arises is how much of this drop in Canadian travel to the United States is the result of a deliberate boycott and shift in preferences as a result of the words and actions of U.S. President Donald Trump and how much is due to the usual determinants of cross border travel which include variables like the Canada-US exchange rate. Past surges and declines – the most famous being the late 1980s/early 1990s cross border shopping phase were strongly affected by changes in the exchange rate.  However, after the travel peak reached in the early 1990s, one can also argue that there has been a longer-term decline in total trips by Canadians to the United States.

 

 

Figure 1 plots monthly data stretching back all the way to 1972 on the total trips by Canadians returning from the United States (Data Source: Statistics Canada v1296956586).  Also plotted on the chart is the monthly exchange rate in terms of US dollars per Canadian dollar with a rise indicating an appreciation of the Canadian currency relative to the US dollar and a decline a depreciation. In 1972, the Canadian dollar was near parity with the US dollar and began a depreciation that by the mid 1980s had brought about a 75 cent US Canadian dollar. There then began a rebound that saw the dollar peak at just under 90 cents US that was also accompanied by the massive cross border shopping surge from about 1987 to 1993.  Incidentally, this also coincided with the introduction of the much-despised GST in 1991.  In general, there do seem to be periods of increase in travel during periods of appreciation and decline during periods of depreciation.  However, the Canadian dollar approached parity again briefly circa 2010 and while travel by Canadians to the United States increased, it did not approach the levels of the early 1990s.

A more useful approach to try and sort out the effects of the exchange rate from those of the presence of the US President would be a regression approach. The accompanying table presents results from a quick regression of the log of the monthly level of all return trips from the United States by Canadians from 1972 to 2025 on a set of variables (with STATA as the estimation package).  First, there are quarterly dummies with the first quarter omitted.  Traditionally, trips peak in the summer months and are lower in the winter months particularly for automobile trips, so the months of the winter quarter are omitted. The 12 months in 1991 that coincide with the onset of the federal Goods and Services Tax (GST) are included as a variable.  The exchange rate defined as US dollars per Canadian dollar is included (Source: FRED CCUSSP01CAM650N and Bank of Canada).  One expects that as it goes up (an appreciation), the level of trips should also be greater.

I then include several additional qualitative variables that try to capture shocks that may have affected travel in the 21^st century including a dummy for the September to December period in 2001 that was marked by the 9/11 terror attacks in New York.  The Covid-19 pandemic variable takes on a value of 1 for the months from April 2020 to November 2021 and of course zero otherwise.  President Trump’s first term from January 2017 to January 2021 gets its own dummy variable and of course so does his second term starting in January of 2025.  

 

 

The results? Well, oddly enough, the exchange rate does not appear to be a statistically significant determinant of Canadians travelling to the United States when the span of monthly data from 1972 to 2025 is considered.  This does seem a bit odd though I should add that if the regression is only run from the 1972 to 2000 period (on the seasonal dummies and exchange rate and omitting all the 21^st century shocks) then one gets the expected relationship.  This suggests that Canadians over time may have perhaps gotten used to a 70-cent dollar and their behaviour became more inelastic with respect to its fluctuations when travelling to the US. 

More interesting are the other variables.  The onset of the GST was associated with a 64 percent surge in monthly trips all other things given.  The months associated with the 9/11 Terror attack saw a 36 percent drop.  The COVID-19 pandemic was associated with a collapse in trips in the order of 230 percent, all other things given.  The first Trump term which did not come with as belligerent a tone towards Canada as the second term was not statistically significant in affecting Canada-US travel.  On the other hand, President Trump’s second term to date after controlling for the exchange rate and seasonality is associated with a statistically significant 34 percent drop in total monthly trips by Canadians to the United States.

Of course, this is a very simple specification, and one might want to add things like income and gasoline prices and perhaps even a time trend but as it stands, it explains about 70 percent of the variation in the monthly level of total Canadian trips returning from the United States.

The Road Ahead: Pictures of Federal Budget 2025

 

With Tuesday’s federal budget receding into history, the opportunity for more reflection emerges and the best way to do that is to look at some charts that consider the budget's projections going forward.  In terms of overall impressions, the mantra of this budget was simply “to spend less so we can invest more”.  After looking at the numbers, the reality is really “to spend less on some things so we can spend a lot more on some other things”.  It bills itself as a transformative budget to address a changing economic world that will build a confident, secure Canada though generational investments in infrastructure and defence and does so largely by adding significantly to the national debt through a series of large deficits. 

The expenditure trajectory is largely a continuation of what was.  However, there is a compositional shift in that spending away from spending on social infrastructure and towards physical infrastructure.  In essence, the federal budget seeks to grow the economy by investing in a lot of public infrastructure projects and national defence and then providing incentives to encourage the private sector to join in. The broad dimensions of both the spending and the outcomes are summarized in the following charts.

Figure 1 plots total federal revenues, expenditures (left axis) and the deficit (right axis) starting from 2010-11and going forward to 2029-30.  As well, each series is fitted with a linear trend.  By 2029-30, total revenue is projected at $583.3 billion and total expenditure at 639.9 billion for a deficit of $56.6 billion.  From 2025-25 to 2029-30, total revenues will grow by 14.1 percent, total expenditures will grow 16.9 percent and there will be $321,7 billion in accumulated deficits. Note the linear trends.  The deficit over the long term is growing as the gap between revenues and expenditure is rising.  

 

A lot is going to be borrowed and servicing the debt will become more expensive over time.  Figure 2 plots both the nominal value of debt charges ($mm) as well as the total expenditure share of debt charges (percent) and does so over a much longer-term perspective starting from 1966-67.  Staring in 2020-21, debt charges began to increase dramatically because of both increased debt (due to COVID) as well as rising interest rates to service the debt and trend will continue.  On the bright side while the debt charge share of total spending is also rising and is projected at 12 percent by 2029-30, it is well below the peaks attained during the 1990s when nearly one third of every dollar of federal spending went to service the debt.

 

Figure 3 also provides a long-term perspective on the net debt both in nominal dollars as well as a share of GDP.  The upward trajectory of the nominal debt after 2018-19 is quite startling with the net federal debt expected to hit 1.798 trillion dollars by 2029-30. Indeed, the period from 2024-25 to 2029-30 will see $404 billion dollars added to the net debt representing over one fifth of the total net debt accumulated in just six years.

 

Of course, all this spending is targeted at dealing with the turbulent world we live in and is being justified as the big transformative spending we need to build Canada’s economy in the face of global competition, tariffs, and the erosion of our relationship with the United States.  Ultimately, the payoff is supposed to be a robustly growing and productive economy.  The next few years however see nominal GDP pretty much close to its historical average of about 4 percent and even assuming population grows at a more historic one percent annually, real per capita GDP is not poised to take off any time soon.  

 

Figure 4 plots real per capita GDP (deflated using the CPI by the way) and its percent growth over the long term.  Notice our productivity dilemma nicely summarized by the long-term downward trend of the growth rate.  Based on nominal GDP growth as forecast in the budget, population growth at one percent annually and inflation at two percent, real per capita GDP is projected to nudge upwards going forward from 2024-25.   It is going to be a tough few years.  It is a gamble to spend all this money with the long-term success predicated on the private sector joining in.  Hopefully, it will work.

Is Canada in Recession?

 

Statistics Canada’s most recent GDP growth rate data shows that the second quarter of 2025 exhibited negative GDP growth. As noted, “After recording declines in April and May, real gross domestic product (GDP) edged down 0.1% in June, driven by declines in goods-producing industries in all three months.”  This of course has sparked talk of recession yet again especially given that the unemployment rate is also on its way up.  Of course, there is always some debate over when a recession is underway and what the definition of a recession should be.

The traditional definition of a recession is two consecutive quarters of real GDP growth.  If the third quarter of 2025 is also negative, then by the traditional definition we will be in recession. The main drawback of this measure is that GDP numbers come out with a lag so that by the time the recession is declared it will have been underway for some time.  An alternate real time indicator of recessions has been devised by U.S. economist Claudia Sahm and known as the Sahm Indicator. It was constructed with reference to the U.S. economy and uses the monthly unemployment rate but can be applied to any country’s national level unemployment rate data.

The Sahm Rule Recession Indicator  "signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months."  If one takes monthly seasonally adjusted unemployment rate data for the population aged 15 years and over data for Canada (Source: FRED LRUNTTTTCAM1565) and calculates the three month moving average unemployment rate and the minimum unemployment rate of the previous 12 months and then calculates the indicator (blue line on the figure), by these calculation Canada appears to have moved into recession territory in October of 2024 as the indicator moved above the 0.5 line (red line on figure) that month and has been above since.  

 

 

As the figure shows, since the late 1950s, the indicator has tracked previous Canadian recessions and slowdowns such as those the 1970s, 1980s, 1990s and the Great Recession of 2008-09 well.

Tariff Exposure and Employment Change in Canadian CMAs: A Crisis Averted?

 

Well, we are now nearly six months into regime change in American foreign and trade policy and the subsequent the trade war and it is well worth seeing what the impact of the trade chaos and disruption has been on employment growth in Canadian cities since January.  Early in 2025, there was a highly publicized report by the Canadian Chamber of Commerce that ranked Canadian CMAs by their exposure and vulnerability to tariffs based on the trade component of their economies.  According to the report, the most tariff exposed cities – and likely to face high economic costs as a result – were Saint John, NB followed by Calgary, Windsor, Kitchener-Cambridge-Waterloo and Brantford Ontario.  Also high on the list after these five were Guelph, Saguenay and Hamilton. At the bottom – the least exposed was Sudbury followed by Kamloops, Nanaimo, Winnipeg and Regina. 

So, how has employment growth in these cities fared since January of 2025?  Figure 1 plots ranked data for Canadian CMAs obtained from Statistics Canada and used to calculate the percent growth in employment from January 2025 to July 2025 (using three-month moving average seasonally adjusted data).  A couple of notes. First, Prince Edward Island is included in Figure 1 treating the small island province as a CMA. It is not in subsequent figures. Second, Belleville-Quinte is not included as the employment growth over these six months came out to 90 percent and the official note mentioned there was a small sample issue and to use caution in interpreting – so out it went. There were small sample issues noted for several other CMAs, but they were retained as the percentage changes did not seem as extreme as Belleville. 

 

 

Figure 1 shows that Canada despite the trade war saw some employment growth going from 20,912,00 jobs in January 2025 to 21,019,900 jobs by July 2025 – an increase of half a percent.  Percent growth in employment was greatest in Red Deer (10.4 percent), followed by Hamilton (8.1 percent), Nanaimo (6.3 percent), Saint John New Brunswick (6 percent), Kamloops (5.8 percent) and Sudbury (5.8 percent).  Of these 41 CMAs, well over half – 25 of them – saw their employment grow since January 2025.  The remainder all saw their employment shrink to varying degrees with the worst hit being Windsor (-5.2 percent), Trios-Rivieres (-4.6 percent), Saguenay (-3.9 percent), Kelowna (-3.2 percent) and Kingston (-3 percent). 

 

 

Based on what were projected to be the worst hit cities because of their tariff exposure, it appears that there are some surprising anomalies.  For comparison purposes, Figure 2 plots the CMAs ranked from highest (most exposed) to lowest (least exposed) based on the February 2025 Canadian Chamber of Commerce study and ranking. Saint John, NB was ranked most exposed and yet at 6 percent growth saw the fourth highest gain in employment across Canada’s CMAs.  Calgary was ranked second most exposed but at 1.2 percent employment growth (well above the national performance) ranked 15^th highest in terms of CMA employment performance.  Most interesting of all is Hamilton, Ontario where there has been much gnashing of teeth and wailing about the demise of steel and its impact on the local economy.  Between January 2025 and July 2025, Hamilton went from 421,3000 jobs to 455,600 jobs – an increase of 34,300 jobs or 8.1 percent growth in employment.  Hamilton was ranked 8^th highest in terms of tariff exposure leading to  the expectation it would be nearer the bottom of any CMA employment growth and yet here we are at essentially first place in the country among major cities (because Red Deer’s numbers are also problematic given the small size of the sample apparently).

Now, at the same time, there are some cities where their negative employment growth has matched expectations given their tariff exposure ranking.  Windsor was ranked third highest in terms of tariff exposure and indeed has fared the worst of all the CMAs.  Trois Rivieres and Saguenay also were highly exposed to tariffs and in both cases are also at the bottom in terms of employment growth.  Sudbury, on the other hand was ranked least tariff exposed of all the CMAs and to expectations, its employment growth has been quite good ranking 6^th highest in the country.  

What this all suggests is that the impact of the trade war and tariffs has probably been more complex and variable on Canada’s assorted economies than one might have expected based either on resilience or local responses as well as other activities which may have taken up the slack.  Hamilton, for example, seems rather anomalous but the reality is that it has a large educational and medical sector and has become a major transport and logistics hub both due to cargo through its airport as well as the location of a large new Amazon distribution centre there. 

 

 

 

The relationship between tariff exposure and employment growth across these CMAs is further explored in the two remaining figures.  Figure 3 is a radar plot of ranked CMA employment against the tariff exposure index, and some very large divergences are obvious.  Saint John ranks quite high in terms of employment growth but there is an extremely large tariff exposure spike associated with it.  Calgary also is approximately in the top third of employment growth but also has a rather large tariff exposure spike.  Figure 4 does a scatterplot with trend charting the relationship between employment growth and the tariff exposure index.  Greater tariff exposure is indeed related to lower employment growth on average but there is a lot of variation around the trend.

All in all, some cities have done much better than one might have expected, some have done worse, and some have been bang-on.  The factors accounting for this variable performance are probably as numerous and unique as the performance differences and greatly influenced by local economic conditions and responses.

Charting CMA Population Growth in Canada

 

The news that the Greater Sudbury CMA is poised to reach 200,000 people much sooner rather than later highlights how Canada’s recent population surge has begun to permeate even regions and cities that for years have seen rather lack luster population and economic growth. In the case of Sudbury, the city’s Mayor has made it his goal to grow the city-region’s population to 200,000 by 2050 and given that it is 2025 and population seems to be over 190,000, it is apparent the Mayor may still be in office by the time the goal is reached and thus able to personally celebrat the achievement. 

Meanwhile, Thunder Bay has embarked on a “Smart Growth” Plan that among other things also seeks to attract new residents and population though it has not set a goal for population. Such goals and forecasts are dangerous given that the urban renewal schemes of the 1960s forecast that Thunder Bay (The Lakehead) was going to hit 186,000 people by the 1980s. Yet, even in Thunder Bay, the news is that population growth has been higher than anticipated in recent years with international migration boosting the population of the CMA to over 130,000.

All the optimism for growth in Northern Ontario’s two major urban areas is a cause for celebration given what have been decades of low expectations and performance.  At the same time, one needs to place the recent performance of northern Ontario’s premiere cities into comparative context.  When one looks at the growth of population of Greater Sudbury, and Thunder Bay relative to other Canadian CMAs, the results suggest that even when growth picks up, the lag abides.

 

 

Population data for Canada’s CMAs from Statistics Canada is used to plot several charts to provide some context for the last statement.  Figure 1 plots Canada’s population by ranked CMA in 2001 but by the current number of CMAs which have increased since that year (for example, Red Deer, Drummondville, Nanaimo, Kamloops and Chilliwack were not CMAs in 2001 but have since grown to over 100,000 people). Not surprisingly, Toronto, Montreal and Vancouver were the top three CMAs at 4.9, 3.6 and 2.1 million people respectively. Of the forty CMAs shown in Figure 1, Greater Sudbury ranked 21^st out of 40 with 164,210 people while Thunder Bay ranked 31^st.  Below Thunder Bay were Moncton, Peterborough, Bellville, Kamloops, Lethbridge, Nanaimo, Drummondville, Chilliwack and Red Deer. 

 

 

Fast forward to 2024 and Figure 2. In 2024, Toronto, Montreal and Vancouver were still the three largest CMAs at 7.1, 4.6 and 3.1 million people respectively.  Greater Sudbury, even with nearly 192,000 people, had fallen to 25^th place while Thunder Bay with 133,000 had fallen to 34^th place out of 40.  Figure 3 plots the percent growth in population from 2001 to 2024 for these 40 CMAs and here the evidence shows that population growth was the highest in Calgary, Edmonton, Kelowna, Red Deer and Chilliwack with growth ranging from a high of 82 percent for Calgary to a low of 59 percent for Chilliwack. In terms of growth rates, Greater Sudbury grew 17 percent putting it in 37^th place in terms of population growth while Thunder Bay at 5 percent growth came 39^th out of 40^th.  While second last place in the population growth sweepstakes is better than last – the honour which went to Saguenay – it was not a sterling performance.  

 

 

On the plus side all CMAs saw growth from 2001 to 2024 but in the end it is both growth per se as well as relative growth that matters if you are seeking to promote a growth agenda.  Of course, the key question is why Thunder Bay (and even Sudbury) have continued to do so poorly when it comes to the relative population growth sweepstakes.  Bear in mind that population growth per se is only one indicator of economic performance and the presence of economic opportunity.  Rising per capita incomes and by extension individual economic welfare require the economy to grow faster than population.  Thunder Bay and Greater Sudbury have done somewhat better in terms of per capita income growth.  For example, out of 64 major Ontario communities ranked by CMHC, Thunder Bay and Sudbury rank 41^st and  21^st  respectively in terms of average household income before taxes placing them closer to the middle of the distribution.

Still, despite the celebration of recent population and urban growth, it remains that Greater Sudbury and Thunder Bay are at the bottom in terms of their population growth when it comes to wider comparisons with the rest of Canada. And even worse, Sudbury’s population growth rate since 2001 has been three times that of Thunder Bay at 17 versus 5 percent. Thunder Bay appears to have been particularly afflicted by low overall growth both in terms of its economy and its population and the question is why?  Is it a function of remoteness?  Likely not as many of these CMAs have as many locational disadvantages as Thunder Bay which likes to boast it is in the middle of the country at the confluence of major transport links. Is it the absence of resources or skilled labour?  Again, likely not given its location in the mineral and forest rich shield and the presence of both a community college and university in the community.  

This leads to another factor – institutions, or the arrangements that people have for dealing with one another.  What is it about Thunder Bay in terms of the environment of the community both in terms of local culture and governance that may be militating against growth?  I would argue that it is the absence of competitive behaviour and the prevalence of monopoly that has most stifled the city’s economic growth and development.  In this regard, Thunder Bay is a microcosm of what ails Canada as a whole – a country that has long tolerated monopolies and oligopolies in its economic fabric as manifested in its banking, telecommunication, transport and retail sectors.

In Thunder Bay, this type of non-competitive behaviour that often seeks to block entry of new firms through lengthy approval processes has been compounded by a monopoly municipal government in the wake of amalgamation that has also effectivelt stifled local initiative and innovation (it is no coincidence economic growth in the city dramatically slowed after the merger of the ultra competititve cities of Port Arthur and Fort William in 1970) and a growing reliance on the public sector as the main driver of activity.  If one looks at Thunder Bay, one third of the population essentially works for the public sector and one third is retired or not working and deriving the bulk of its income from some sort of public sector pension.  The remaining third is your private sector and even they are essentially tailoring their businesses to attracting the spending of either the public sector directly via public sector construction projects and contracts or those who derive their incomes from public sector pensions.   With the taxpayer footing the bill in one form or another, there is little incentive for competitive behaviour even in the local private sector and their captive market often results in cost overruns especially on public sector projects.

Needless to say, it is amazing that Thunder Bay's population has grown as much as it has.

The Canada-U.S. Trade War: Why No Recession Yet?

Despite the continual onslaught of announced American tariffs and what one would expect would be a major slowing down of our economy, Statistics Canada reports the June employment numbers have exhibited a surprising resilience. In turns out employment increased by 83,000 (+0.4%) in June and the employment rate rose by 0.1 percentage points to 60.9% while the unemployment rate fell to 6.9%.  For a country that is apparently undergoing the hardship of the Trump-Led War on Trade, this is not exactly an economic apocalypse.

This has of course already been noted by other economic observers such as RBC economics which has attributed the resiliency to “the USMCA, which shielded Canada from some of the harshest tariff measures—ultimately making it the least affected U.S. trade partner rather than one of the most, as was originally feared.”  Despite announcement of double-digit tariff rates, the effective tariff rate on Canadian goods prior to all of the tariff chaos was 2.5 percent and is now at 4.6 percent.  While not ideal, it is not the end of the world for Canadian exports to the United States.

The other thing that has been going on and is perhaps contributing to the increased resilience of the Canadian economy despite hits to sectors like aluminum and vehicle manufacturing is that Canadians themselves have been retaliating to U.S. economic actions in a pretty coherent self-organizing fashion.  Without any official central direction, Canadians have been more likely to shop and travel domestically and reorient their spending away from the United States and into Canada. 

For example, take travel to the United States. As noted recently by Statistics Canada “While Canadian-resident return trips from overseas countries increased 7.3% from June 2024 to 876,800 in June 2025, Canadian-resident return trips by air from the United States dropped 22.1% to 363,900.” As well, “in June 2025, the number of Canadian-resident return trips by automobile from the United States totalled 1.3 million, a steep decline (-33.1%) from the same month in 2024 … June 2025 marked the sixth consecutive month of year-over-year declines.” This is a major reorientation of travel expenditure away from the United States and back into Canada.  Moreover, there is apparently an uptick in European visitors who are choosing Canada over the U.S.

And then there is the matter of domestic consumer spending away from U.S. products which American visitors to Canada have noted even if the wide swath of the American public is oblivious to this type of shift.  Again, in a pretty much self-organizing fashion, many Canadians are making choices to not buy American when they can, which is a difficult activity given the plethora of American products in our stores after decades of intertwined economies.  As noted in the New York Times “A recent Ipsos poll found that three-quarters of Canadians surveyed said they intend to forgo travel to the United States, while 72 percent said they will avoid buying U.S.-made goods. American brands have even jumped on the bandwagon, with companies like McDonald’s stressing their Canadian ingredients.”

The danger here  to United States is that even if and when relations between the two countries go back to some semblance of “normalcy”, a disruption in patterns of behaviour is likely to have some long-term effects.  For example, many Canadians have traditionally equated travel with trips to the United States because it is an interesting place to visit and convenient to access relative to even their own country.  Now, that they have been given the opportunity to try something different, some of that change will remain afterwards.  Combined with attempts underway to shift trade patterns away from the U.S. not only in Canada but the rest of the world, some of these shifts are going to be permanent.

In the interim, spending more Canadian dollars domestically rather than on American imports of goods and services (which includes travel) means that our marginal propensity to import from the United States is falling and the marginal propensity to consume domestically is rising. Remember your simple first year economics macro model of income determination and the expenditure  multiplier with taxes and trade?

Y = A[1/(1-z)]

Where z = MPC(1-t)-m and with Y as national income or GDP, A as autonomous expenditure (exogenous consumption, investment and government spending and including exports), MPC as the marginal propensity to consume, t as the tax rate and m as the marginal propensity to import.  Using this, we can construct a simple example to show what happens when the MPC goes up and m goes down.

According to my ChatGPT query, Canada’s nominal GDP is currently at about 3 trillion dollars. It suggested a marginal propensity to consume of 0.8 is what the Bank of Canada often uses in its models and that a marginal propensity to import of 0.3 is reasonable. As for the tax rate, based on total tax revenue for all three levels of government to GDP, a rate of 0.35 is reasonable.  Plugging these numbers into the formula with a GDP of 3 trillion dollars, you get an expenditure multiplier of 1.28 and autonomous expenditure of 2.34 trillion dollars.

Suppose that the propensity to import goes from 0.3 to 0.25 while the marginal propensity to consume domestically goes up to 0.85. The value of the multiplier goes up to 1.43 and given the autonomous spending of 2.34 trillion, GDP now rises to 3.36 trillion dollars – an increase in GDP of over 11 percent.  Naturally, rising economic output should  be accompanied with a fall in the unemployment rate. It should also be noted that our exports to the United States (which is in the autonomous spending component) have been taking a hit so this would somewhat counter any rise in GDP from the effects of increased domestic spending.

My point is that lowering our marginal propensity to import and redirecting it towards consumption of domestic items is likely going to have an effect that at least partially counters the drop in our exports and therefore helps stabilize the Canadian economy during the impact of the tariff and trade dispute with the United States.  The extent to which this may or may not be happening is of course an empirical question but the evidence to date suggests that Canada’s economy has been more resilient in the face of tariffs than expected meaning that there may indeed be such an effect underway. The clearest evidence is that tariff war or not, there is no recession yet.

Even more important, this resilience is not the result of direct government actions, but a result built on the responses of individual Canadians.  It really is the most effective response of all.

 

The Misery of Youth

 

As the economy slows and unemployment rises, the discussion has inevitably turned to the plight of youth in Canada who are facing the worst youth unemployment rates in decades. As one report has stated: “Apart from the pandemic, Canadian graduates between the ages of 15 and 24 are facing the highest unemployment rate this country has seen since the mid-1990s, according to first quarter data from Statistics Canada.”  Not only are recent graduates faring poorly but even summer employment is at a premium and some of the blame has been placed on the recent admission of record levels of low-skilled migrant workers.  When combined with persistently high prices including the cost of housing and economic uncertainty the current situation particularly with Generation Z is being seen as anxiety inducing and the worst ever.

Figure 1 plots the monthly youth unemployment rate obtained from Statistics Canada covering the period January 1976 to April 2025.  Current youth have experienced the highest youth unemployment rate ever in the recent past – that of the pandemic – but the COVID-19 Recession was not a standard recession in that much of the downturn was policy induced because of shutdowns and lock downs which is some countries lasted longer than others.  Youth unemployment in Canada peaked at 30 percent during the pandemic and was the highest ever during the 1976 to 2025 period. However, what is notable is that even including the pandemic in drawing a linear time trend (which would serve to pull the line upwards), there is a noticeable downward trend in youth unemployment rates over this entire period.  

 

 

As for the claim that the current youth unemployment rate of 14 percent is the worst since the recessions of the 1990s, it was higher during the Great Recession of 2008-09 – at over 15 percent – and even higher during the recessions of the early 1990s and early 1980s.  Indeed, if one is looking for anxiety causing economic events for Canadian youth, the period from 1970 to 1995 saw recession over 1973-75, stagflation during the mid and late 1970s, a recession in 1981-82, a major stock market crash in 1988 and another recession in 1991-92 followed by the federal fiscal crisis.

It cannot be denied that Generation Z youth and younger Millennials are having a particularly tough time now given that they were born in the first decade of the 21^st century and have gone through the 2008-09 Great Recession, the pandemic, a major bout of inflation and now the uncertainty regarding the economy because of the trade and tariff war.  However, what one terms as the worst ever seems to have become somewhat subjective  and generally refers to whatever is the memory span of the afflicted generation or cohort. And the matter is not helped by what is often the short-term focus of media analysis in terms of time spans that consider a couple of decades ancient history.  It often helps to put things in a longer historical perspective which of course is limited by the availability of the data.  It also helps to try and measure economic distress more quantitatively and with as broad a measure as possible.  

 

 

Figure 2 puts together several variables that can be considered as having an impact on the welfare or misery of people in general and youth in particular – alongside the youth unemployment rate are plotted the central bank rate and the CPI All Items monthly inflation rate (seasonally adjusted).  It turns out that along with youth unemployment being higher in the late 1970s and early 1980s relative to the present, so were inflation rates and the bank rate.  The bank rate meant that mortgage rates for first time home buyers coming onto the market were extremely high and while one can argue that housing prices were extremely low even relative to the incomes earned at the time the fact remains that frequent recessions and job losses combined with rising food prices created challenges for the youth of that era also.

Trying to put the misery of youth today in some kind of historical context requires a more multi-dimensional measure that tries to combine another of factors over time - enter the misery index.  The misery index, an economic indicator first created by economist Arthur Okun during the 1970s, was designed to measure economic misery.  The 1970s were marked by what is known as stagflation and were characterized by high inflation and unemployment, following the oil price shock and its quite significant macroeconomic impact on everyone including youth. The misery index added the rate of inflation to the unemployment rate, with higher totals indicating more economic distress for the public.  While not a perfect measure of economic welfare, the misery index can be useful in gauging the current mood of economic angst and misery. Using monthly data from Statistics Canada, the next chart plots monthly for the period 1976 to early 2025, what can be termed a Youth Tri-Misery Index -the sum of the central bank rate, CPI All Items Inflation Rate and the youth aged 15 to 24 unemployment rate. 

 

 

As Figure 3 illustrates, youth misery has been on the rise since even before the pandemic.  It had been on a persistent downward trend since the early 1990s with the reversal starting somewhere around 2016-17.  Misery shot up during the pandemic and after the post-pandemic drop has resumed an upward trend with the present impetus being rising youth unemployment even as the bank rate and inflation have come down. However, the peak period for misery over the entire 1976 to 2025 period based on the measure provided in Figure 3 is not the present but the early 1980s.

A 20-year-old coming onto the labour market in 1981 would have been born in 1961 – ostensibly a member of what is considered the blessed baby boom generation.  And yet, 1961 represents the tail end of the baby boom and the tail end of a boom has its own unique dynamics.  It is much like arriving at a wedding after 11 pm.  The main meal has been served and program of events completed but you can still have a few drinks and perhaps partake of a light midnight buffet dinner.  The 20-year-old coming onto the Canadian labour market in 1981 had already seen a recession and stagflation as a teen, experienced a recession in the early 1980s, may have bought a house at double digit interest rates in the early 80s, saw a boom in the mid 1980s, a stock market crash in 1988, and a major recession in the early 1990s (during which many lost the house they had bought in the early 1980s).  And if they worked for the public sector in the 1990s experienced either federal and provincial restraint brought about by the federal fiscal crisis. It was not exactly a picnic - I know, I was there - but escaped relatively unscathed though marked with a perpetual risk averse caution.

My point is not that the youth of the past had it harder than those of the present. I really do not know how a current twenty-year-old feels when faced with economic challenges given the experiences and, background and preparation they have had to date.  However, youth at any point in history face challenges and the key should be to address the problems they face at a point in time rather than engage in inter generational comparisons of how hard done by someone is or how the past had it better.  Much of the current attention especially within the framework of social media seems designed to inflame feelings between cohorts and generations rather than devise and implement solutions to pressing problems like rising youth unemployment or the cost and affordability of housing.

For example, there seems to be a perception that people can be easily divided into generational cohorts, and this division is then used to stereotype the experience of each generation.  For example, it is true that older Canadians on average have experienced a windfall in wealth due to the rise in prices since 2010.  However, not every older Canadian has a house in Toronto or Vancouver that represents a multi-million-dollar nest egg.  Even the much-maligned baby boomers have had a more diverse set of economic experiences than one might expect and not all are effortlessly gliding from one shopping and travel experience to another funded by their bounteous home equity. Growing up is a tough experience and we need to help those having a tough time, but we should start by being a bit more grown up in the analysis and conversations that we have.

Nation Building and Northern Ontario

 

Yesterday’s Throne Speech emphasized that the world has shifted and is more uncertain but that it is also a time of opportunity to reforge Canada’s economic and political relationships and embark on economic nation building that could be the largest transformation of the Canadian economy since WWII.  There was a commitment to major national infrastructure projects as well a movement to remove federal barriers to internal trade to enhance the Canadian economic union.  However, the details of what is going to be done remain a work in progress and that suggests that there are still opportunities to put forth new ideas.  If Canada is going to embark on a period of building a larger internal economy and putting in place national infrastructure projects, attention needs to be paid to the transportation links that knit the economy together - in particular, the road network.

The highway and road transport network in Canada has been key in facilitating our trade and commerce particularly with respect to the United States.  Truck transportation accounts for nearly half of the Canadian exports shipped to the United States and nearly 70 percent of the goods imported from the United States.  The east west dimension of Canadian internal trade should also not be underestimated when examining the role of road transport in facilitating the Canadian Economic Union.  For example, it has been noted that “$528 billions of goods and services moved across provincial and territorial borders in 2022—equal to 18.8% of Canada's gross domestic product. Furthermore, one-third of Canadian businesses participated in internal trade by buying or selling goods across provincial and territorial borders in 2023.”

If there is to be more east-west internal trade within Canada as trade barriers are removed, it stands to reason that much of this commerce will flow through the Highway 11-17 corridors in northern Ontario.  However, the roads here are already severely stressed by the post pandemic increases in transport trucks and associated accidents.  According to the OPP, 60 percent of fatal crashes in Northwestern Ontario alone (21 fatalities) in 2024 involved transport trucks.  This is not surprising given the increase in truck volume as well as the two-lane nature of much of the highway system in northern Ontario. While there are more passing lanes in place than 20 years ago, in many respects little has changed in what is a vital zone of national transit.  As noted in a much earlier pontification on this topic:

“Canada is the largest developed country in the world without a system of fully grade-separated roadways that allow uninterrupted traffic flow between its major urban centres. The key roadblocks include the two-lane stretches from the Manitoba border to Sudbury and much of the route between the Alberta border and Kamloops. Most importantly, the Trans- Canada is still a two-lane stretch through the vital zone of transit through northwestern Ontario connecting the East with the West from the Manitoba border to Sudbury, leaving the nation's east-west flow of personal and commercial traffic subject to the whims of an errant moose. The slow travel times and disruptions make cutting through the United States an attractive option for east-west travellers, despite the absence of an Interstate route along the border, but U.S. border crossing formalities have also made this more difficult and time-consuming.”

If U.S. border issues were a concern two decades ago, they are even more significant now.  In improving the east-west highway link through northern Ontario, there are definite challenges of cost rooted in both distance and geography but if the Europeans can tunnel through mountains to build their autobahns and autostradas, then surely, we can deal with rocks, trees and muskeg.  There are two key highways – Highway 11 which can be termed the northern route and Highway 17 which can be term the southern route though both come together as 11-17 from Nipigon to Shabaqua.  While a portion of the stretch between Nipigon and Thunder Bay is being four-laned, after nearly 20 years the four-lane project here is still not complete.  Moreover, it remains that there is a bottleneck at Nipigon given the national highway system comes to one choke point at the Nipigon Bridge which is subject to disruptions.

What should a national project to improve the Trans-Canada through northern Ontario look like?  Here is my suggestion. Highway 11 from North Bay to Nipigon should be four-laned. The 400 from Barrie to Sudbury is nearly completely four-laned.  After Sudbury, constructing four lanes on highway 17 is more problematic for several reasons but Highway 17 from Sudbury through to Sault Ste. Marie to Nipigon should be subject to 2+1 upgrading – essentially a three-lane highway with a centre passing lane that alternates every two to five kilometers. 

While the Ontario government is planning to do this on Highway 11 north of North Bay, the entire stretch of Highway 17 from Sudbury to Nipigon should be done this way.  Highway 11-17 from Nipigon to Shabaqua should be four-laned.  Highway 17 from Shabaqua to the Manitoba border should be four-laned.  And, if more resilience is desired given the potential bottleneck at the Nipigon bridge, thought should be given to an additional crossing over the Nipigon River between MacDiarmid and Nipigon that would consist of a 2+1 highway to Upsala.  There is also the issue of Highway 11 past Shabaqua that ends in a U.S. border crossing leaving only one major highway crossing between Manitoba and Ontario that may need to also be explored. However, a bottleneck on flat land is in somewhat of a different league than one over a water crossing.

Of course, the element of cost here is paramount.  Estimates of the cost per kilometer for 2016 for northern Ontario alone suggest a range between $350,000 and $550,000 per kilometre. One suspects that in the wake of the pandemic like everything else, costs have grown substantially. However, we have both a Prime Minister who wants to nation build as well as strengthen the Canadian economic union and facilitate more internal trade as well as an Ontario Premier who wants to invest in nation building projects that includes a tunnel under the 401 and a deep water port on James Bay – not exactly cheap projects.  The transport infrastructure for a stronger east-west commercial union is necessary and yet has been strangely missing from both the national and provincial discourse.  

Nevertheless, it is somewhat refreshing to have a government that seems ready to embark on aspects of  sovereign reconstruction (after a decade of what I suppose can then be termed sovereign deconstruction).   However, when to comes to sovereignty and enhancing our national economic space, words are not enough.   There will need to be action and that action will require investing in transportation infrastructure that enhances Canada’s economic space as an economic union.  Improved highway links through Northern Ontario are key to doing this and a start would be our northern Ontario federal and provincial MPs and MPPs recognizing this and making the case.