Canada's Wheel of History

“So in the Libyan fable it is told That once an eagle, stricken with a dart, Said, when he saw the fashion of the shaft, ‘With our own feathers, not by others’ hands, Are we now smitten.”

― Aeschylus

 

The merger of the Northwest Company of Montreal (NWC) and the Hudson Bay Company (HBC) in 1821 led to the complete absorption and end of the Montreal based fur trade.  The negotiations in London ultimately pitted the western based partners of the NWC against the eastern based Montreal agents who were apparently unaware the other was negotiating with the HBC.  In the end, the HBC negotiators were able to extract better terms as a result of the lack of unity amongst the NWC shareholders.  The tension between the western based Wintering Partners in the fur resource hinterlands and the capital raising Montreal Agents eventually proved to be the Achilles heel of the NWC. 

As noted by Harold Adams Innis, the NWC, whose operations stretched from east to west along the waterways of the Canadian Shield, was essentially the forerunner of the Canadian federation.  The east-west tensions of the fur trade have also been replicated within Confederation with the western resource-based provinces in particular tugging against capital intensive central provinces of Ontario and Quebec.  While history does not repeat, itself, the similarity of circumstances and economic forces does lead to what can best be termed repetitive patterns of issues. In the case of western Canada, much of the tension is rooted in historical grievance given that unlike Ontario and Quebec, the west did not get control of its natural resources from the federal government until 1930.  Moreover, federal resource and energy policy – in particular the National Energy Program of the early 1980s – was seen as directly counter to the economic and business interests of energy producing western provinces.

Which brings us to the present day and the current desire by some Albertans to separate from Canada.  Despite a federal government that appears quite sympathetic to Alberta’s current energy interests, Alberta is embarking on a referendum to decide whether to hold a referendum on separating from Canada. It appears that Canada will again be consumed with fate of the nation debates, dilemmas and brinksmanship.  And, depending on what happens this fall in Quebec, there is the distinct possibility that the Parti Quebecois will form the government with the prospects of yet another sovereignty referendum in that province.  Needless to say, there will again be a market for assorted Captain Canadas to come to the rescue.  When not railing against Ottawa, there is nothing Canada’s Premiers like better than embarking on heroic cross Canada tours professing their love for the country.   After all, what better way to divert constituents from their provincial problems than by their dashing Premier helping to save the country.

Canada has always been one of the most fortunate and blessed of countries possessing abundant resources, oceans on three sides to shield us from adversaries and despite recent frictions, a largely benign southern neighbour that served as an economic partner and yet was generally oblivious of our presence.  Canada developed a high material standard of living and by the measures of a dangerous world, a rather open and unique approach to international relations that allowed us to underspend on national security while moralizing and lecturing others without worry as to the consequences. We became a nation of happy Hobbits, dancing away the long summer days and celebrating our good fortune while ignoring the dark Mordorian clouds swirling about.

Taking Canada’s blessed situation for granted afforded us the luxury of consuming ourselves with questions of national existence.  It also created situations that by world standards, were somewhat comedic.  After all, what other country could have pulled off the self-absorbed 1990s drama of having a separatist as the Leader of Her Majesty’s Loyal Opposition?  On the one hand, that Canada could undergo such tensions and stresses and remain a bastion of civil order and discourse, is an achievement in itself.  On the other hand, how many times can a country continually come to the brink and then retreat?

It is now Alberta’s moment in the sovereignty sun and its Premier in typically Canadian fashion has decided that it will be a referendum if necessary but not necessarily a referendum.    The Premier of Alberta is not a separatist and notwithstanding legitimate concerns regarding equalization, resource management and energy policy, neither are the vast majority of Alberta’s people. However, the Alberta Premier is a politician and is forced to balance diverse interests and constituencies with a referendum stand that in the end will likely satisfy no one.  However, wielding the separatism spectre might be a convenient cudgel in making sure Alberta’s energy sector is in no way compromised in the upcoming CUSMA negotiations and that the federal government does not retreat from its advocacy for new pipelines.  It is however a dangerous game.  When you light a fire, you do not always get a controlled burn.

Of course, there are some Albertans who would be happy to leave the most successful federation in modern history for a future as a landlocked country joining the ranks of Kyrgyzstan, Ethiopia and Uzbekistan. To be fair, these same Albertans probably see their future more as a unitary energy powered Switzerland or Austria.  Interestingly enough, these very successful countries are actually federations rather than unitary states and also not dependent on boom bust energy products for twenty percent of GDP and government revenues, as well as seventy percent of exports.  While Alberta has the highest per capita GDP in Canada and is riding a wave of prosperity, it risks creating investment uncertainty for itself and the rest of the country.  As economist Trevor Tombe has noted, a separate Alberta would be a poorer Alberta.  It is likely not a coincidence that never-ending threats of separation and referendums in Quebec until the 1990s were correlated with the stagnation of Montreal’s economy and the growth of Toronto’s.

Yet here we are.  This new wave of national torsion will come at a time not only of growing international political and economic uncertainty, but in the midst of what will likely be a most acrimonious and hardball renegotiation of our trading relationship with the United States.  Needless to say, Canada is the most self-indulgent of countries if it believes that internal divisions will not affect its role in the world and will not be taken advantage of by adversaries.  In the end, if we are unable to make our way in the world via improved trade arrangements and investment because of continued unfortunate distractions generating political and economic uncertainty, we will have no one but ourselves to blame.

 

 

 

 

The Fork in the Road

  

“Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

Robert Frost

 

As our glacial spring morphs into summer like weather, we are also approaching a crossroads of sorts, a fork in the road if you wish. Over the last year, Canada’s government has been navigating a somewhat delicate road between its vital economic relationships with a volatile and more aggressive United States and attempts to diversify our trade and security relationships with like minded middle powers.  At some point, most likely this summer, Canada will need to make some decisions that will require commitments. Moreover, despite the attractions of poetry, automatically taking the road less travelled may not necessarily be the best option as it could make a difference not compatible with our best long term economic interests. Yet, the more travelled road comes with its own challenges.

We are poised at the junction of two roads.  First, there is the continuation our North American trade zone as currently embodied in the Canada-US-Mexico (CUSMA) trade arrangement with new emphasis on our trade with Mexico.  This arrangement has been under siege of late with higher tariffs levied on our auto production, steel, aluminum and forest products.  Yet about 90 percent of our exports still flow tariff free into the United States and our economy has been surprisingly resilient over the last year. This economic arrangement is the result of over a half century of North American economic integration and has benefitted Canadian energy producers, manufacturers and business in general.  Despite the pronouncements of President Trump, it has also been of great benefit to the United States in terms of providing a market for its manufacturers, raw materials for its industries, and a secure fossil fuel energy source that is sold to them at a discount of between $10 and $20 a barrel known as the WCS-WTI differential. Indeed, Canada accounts for about half of the crude oil imported by the United States but it then re-exports some of it at the world price yielding a windfall to the US of nearly $20 billion annually.

The other approach is what can best be described as a New National Policy driven by the change and disruption in the US led world economic and security order.  Essentially, in this approach, Canada will pursue trade and export opportunities with Europe and Asia for its goods and resources to build an east-west flow to complement the north south flows of CUSMA.  This will be accompanied by investment in defence production and security arrangements with like-minded partners in Asia and Europe.  In essence, Canada and its Arctic become a Zone of Transit for these east-west global flows.  To some extent, the marathon trade and marketing trips undertaken by the Prime Minister to bring this about have been bearing some fruit.  For example, our investment drought has taken a turn for the better with foreign direct investment in Canada hitting a $93 billion high. However, nearly half of that has come from mergers and acquisitions rather than the financing of new productive activity. While such a successful metric may befit the efforts of an investment banker Prime Minister, it remains that investment in productive capital rather than asset ownership rearrangement is what is needed to improve Canada’s poor real per capita GDP growth performance.

Of course, which road we will take is uncertain.  On the one hand, Canada still relies on the United States for nearly three quarters of its export market and even without CUSMA, the fact is that the United States is a natural trade partner given we share the continent with them and the north south physiography of North America favours trade with the United States.  As well, despite our pronounced flirtation with the EU and even hints of membership, realistically, that will require a level of political and regulatory integration of social and economic policies that will be blocked first and foremost by Canada’s provinces who after 150 years of Confederation have yet to address inter provincial trade barriers.  At best what we are looking at is perhaps an  “Associate EU Membership” that will boost trade, investment and defence but even there the reality remains that all the members of the EU have yet to approve full implementation of the Canada-EU free trade agreement reached in 2017.

Prime Minister Carney is of course aware of these challenges which is why it appears he is hedging his bets.  On the one hand, he travels the globe making deals and dangling the prospect of Canadian military purchases of Korean submarines and Swedish fighter jets while maintaining that Canada must seek non-US trade partners.  On the other, he remains open to deeper integration with the United States in some sectors with the likelihood that current arrangements in energy and auto manufacturing are what he wishes to continue.  Of course, there was a time when some type of deeper common market arrangement with the United States with common external trade policies might have been the next step to deeper North American integration, but the actions and antics of the Trump administration have nixed that path with the Canadian public for the next fifty years. The point worth considering is that despite greater integration and a larger effective market, over the last few decades, our productivity has declined rather than grown with such advantageous access to the US market.

Ultimately, what Prime minister Carney seems to be signalling is that at this fork in the road, Canada will be travelling down both roads at once.  It will pursue greater integration with the United States, if necessary, along the lines of the existing relationships in energy, steel and auto manufacturing but it will likely not expand or create new ones in either those areas or even other areas.  At the same time, Canada will seek to expand trade with Europe and Asia especially with regards to energy and resource developments though even here, to put our money where our mouth is, we will need to build new pipeline and transport capacity.  Moreover, we will need to offer some tangible evidence we are serious about diversifying away from the United States such as buying Swedish fighter jets or Korean or German submarines.  Needless to say, the Americans will likely not take kindly to such impertinence given that their approach to trade with Canada seems to be “what is ours is ours and what is yours is negotiable”. How dare we spurn their wares.

Still, here we are and by summer’s end we are likely to get some answers as to whether or not Prime Minister Carney’s strategy is working. Stay tuned.

 

 

Explaining Canadian Gas Prices

  

Since the start of the U.S.- Iran war and the blocking of the Strait of Hormuz, gasoline and fuel prices around the world have soared.  As of yesterday, the daily national average gasoline price in Canada according to CAA was 184.8 cents per litre though of course it varies across the country.  For example, in Thunder Bay this weekend, it hit 203 cents per litre.  Reasons for variation in Canadian pump prices at least according to the CAA include seasonal changes, weather conditions, increased demand, geopolitical conflict, status of oil and gas reserves, refining capacity, and the value of the US dollar given crude prices are in USD.

Of course, despite having substantial supplies of domestic oil, in the end, Canada’s gasoline prices at the pumps are tied to the international price of oil and so what better comparison is there than looking at Canadian gasoline pump prices relative to the international price of a barrel of oil as measured the price of West Texas Intermediate Crude (WTI). For the period January 1990 to April 2026, Figure 1 plots the monthly 18 city average of Canadian self-serve unleaded regular gasoline prices in cents per litre calculated from Statistics Canada (Table: 18-10-0001-01 (formerly CANSIM 326-0009)) alongside the monthly price in USD of Cushing, OK WTI Spot Price FOB taken from the U.S. Energy Information Administration.

 

 

The two series certainly seem to move together.  However, simply eyeballing the movement does not really tell us how sensitive the Canadian price at the pump is to the international price of crude.  For that, linear regression is a better tool.  I took the log of the two series and then ran a very simple linear regression of Canadian gasoline prices on the WTI price.  For the period January 1990 to April 2026, there was an r-squared of 0.86 and a coefficient on the price of WTI of 0.54.  What this can be interpreted as given it was a log-log regression is that since 1990, a 1 percent increase in the price of a barrel of WTI in USD results in a 0.54 percent increase in the average 18 city price of Canadian regular unleaded gasoline at the pumps. 

Has this been a stable relationship over time?  Well, the data was broken up into two approximately equal time periods – January 1990 to December 2007 and January 2008 to April 2026 – and two more regressions were run.  The results were interesting as they suggest that the price of gasoline in Canada over time has become less sensitive to the international price of crude.  Moreover, the two periods separately are less sensitive to the price of WTI than when combined if one looks at the coefficients on WTI. For the pre 2008 period, the r-squared was 0.91 and the coefficient on WTI was 0.44 whereas for the post 2008 period the r-squared was 0.35 and the coefficient on WTI was 0.33.   

Essentially, the results seem to suggest that over time the price of Canadian gasoline at the pumps seems to have become less sensitive to fluctuations in the price of WTI with variations in the price of WTI explaining over 90 percent of the variation before 2008 and barely one third since.  What other factors might explain trends in Canadian gasoline prices?  Well, there is the list of variables provided by the CAA, alongside which one could perhaps also add any changes in fuel taxation by the federal and provincial governments over this period as well as the degree of competition in the Canadian retail gasoline market. Naturally, a fuller and more detailed analysis with more control of assorted confounding factors would be quite interesting. 

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.

Population Growth in Canada's CMAs: An Update

  

A couple of weeks ago, Statistics Canada updated its population estimates for sub provincial areas including CMAs (Census Metropolitan Areas) and CAs (Census Agglomerations). In terms of the distinction between the two, CMAS have populations of over 100,000 while CAs range from 10,000 to 100,000.  As the release noted:

“On July 1, 2025, the total population of Canada's 41 census metropolitan areas (CMAs)—large urban centres with populations above 100,000—reached 31,169,100 people. Following three years marked by strong population growth, CMAs experienced significantly slower population increases from July 1, 2024, to July 1, 2025 (+1.0%). In contrast, the population grew by 3.5% from July 1, 2023, to July 1, 2024. Regions outside of CMAs also experienced slower population growth from July 1, 2024, to July 1, 2025. Census agglomerations (CAs)—smaller urban centres with populations ranging from 10,000 to 100,000—saw their population grow at a rate of +0.9% during that period, while areas outside CMAs and CAs grew by +0.7%. One year earlier, those areas had recorded growth rates of +2.0% and +1.0%, respectively.”

 

 

That population growth slowed in 2025 because of changes to immigration is the key story in this release but what is also interesting is what population change has been like over the entire pandemic and post-pandemic period - from 2020 to 2025 - considering the new updated numbers.  Figure 1 plots the ranked percentage growth in population for Canadian CMAs from 2020 to 2025.  Over this period, Canada’s population grew from 38.023 million to 41.652 million – an increase of 9.5 percent or 3.623 million.  Growth in the urban areas was 10.4 percent for all CMAs and CAs combined and 10.9 percent for the CMAs alone.  The fastest population growth was for Moncton (24%), Calgary (20.1%), Kitchener-Cambridge-Waterloo (17.8%), Oshawa (16.3% and Edmonton (15.8%).  Out of the 43 CMAs, Vancouver ranked 18^th at 12.3% growth, Toronto ranked 27^th at 9.5% growth and Montreal 41^st at 5.5%.  

 

 

Of course, what is also of interest to those of us here up North is that northern Ontario CMAs also saw an increase in population with Greater Sudbury seeing an increase from 176,580 to 194,278 – 17,698 more people for an increase of 10 percent. Thunder Bay saw an increase from 128,815 to 133,765 for an increase of 4,950 people or 3.8 percent.  Incidentally, of the 43 CMAs, Thunder Bay ranked 43^rd.  Naturally, many local boosters will argue that Thunder Bay is unique and comparing Thunder Bay with so many larger centres is like comparing apples and oranges, so Figure 2 provides a ranked comparison with our own local fruit orchard and also includes CAs.

Figure 2 shows that the fastest growth over the 2020 to 2025 period was in North Bay at 13.8 percent.  North Bay’s population rose from 73,974 to 84,384. The next largest percent increase was for the Sault which went from 80,757 to 88,307 for an increase of 10.1 percent. Greater Sudbury came in third with an increase of 10 percent while Timmins was 4^th with an increase of 2,999 people or 7.5 percent.  Thunder Bay came in 5^th at 3.8 percent and managed to beat out both Elliot Lake (1.6%) and Kenora, which saw a decline of 1.5 percent.

Those are the numbers as they currently stand.

House Prices in Thunder Bay and Sudbury Continue to Rise

  

The latest report on Canadian house prices by Teranet is out and though the focus is on the 11 largest CMAs, there is also data on smaller centres.  On an annual basis (December 2024 to December 2025), home prices in Canada using the Teranet composite Index declined by 3.5 percent. Cities in the GTA and southern Ontario in general saw some large annual declines but some other cities, including Thunder Bay and Sudbury climbed substantially.  As the report notes:

“The Teranet-National Bank Composite Home Price Index™ fell by 3.5% between December 2024 and December 2025, a steeper decline than the 2.8% drop seen the previous month. However, increases were recorded in seven of the 11 cities that make up the composite index in December. Quebec City led the way with a 12.6% year-over-year price increase, followed by Edmonton (+5.1%) and Winnipeg (+5.0%). Conversely, the largest declines were observed in Toronto (-7.8%), Hamilton (-7.8%), and Vancouver (-5.9%). Of the 18 other CMAs not included in the composite index, 12 posted annual declines. Among the declining markets, the sharpest decreases were recorded in Oshawa (-8.2%), Guelph (-8.2%) and Kitchener (-8.0%). Conversely, the largest increases were observed in Lethbridge (+10.1%), Thunder Bay (+9.0%) and Sudbury (+8.8%).”

The accompanying figure plots the ranked year over year price increases (December 2024 to December 2025) for the cities in the Teranet data.  Topping the rankings are Quebec City and Lethbridge with year over year house price increases of 12.6 and 10.1 percent.  Thunder Bay and Sudbury are at the top of these rankings also in 3^rd and 4^th place respectively with increases of 9.0 and 8.8 percent.  Of the ten largest decreases, eight out of the ten largest decreases were cities in Ontario with the other two being in British Columbia.  

 

Overall, the Thunder Bay market is apparently still quite robust.  According to the Thunder Bay Real Estate Board, sales of single detached homes in Thunder Bay in December totaled 61 units and overall there were 1,023 home sales in 2025 for an increase of 9.1 percent over 2024. The year-to-date median price for a home in Thunder Bay according to the TBREB was $395,000.  As for Sudbury, the Sudbury Real Estate Board saw 110 homes sales in December 2025 and year over year saw sales of 2,618 units for a gain of 2.7 percent from 2024.  The average price of a home in Sudbury in 2025 was $505,884 and represented an increase of 5.8 percent from 2024.

If anything, these numbers may give an indication of what cities have been hit the hardest hit by the current economic uncertainty and change.  There are 29 cities ranked in the accompanying figure and of those 13 saw an increase in house prices and the remainder a decrease. Of the 16 Canadian cities in this ranking that saw a year over year decline, four of them were in British Columbia and all the rest were in Ontario.

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.