As the potential 51st state, Canada faces a very uncertain future economically
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Canada has a snap general election today. It’s been called by the new prime minister Mark Carney, the newly elected leader of the incumbent Liberal party government. The Liberals had been led by Justin Trudeau for years, but he stood down in 2024 because of his increased unpopularity and splits among the government leaders. The ensuing party election saw Carney take over.
Mark Carney is the epitomy of a banker turned politician. Formerly, yet another Goldman Sachs executive (13 years), he became governor of the Reserve Bank of Canada and then governor of the Bank of England (seven years). On leaving that post, he prepared himself for a political career. Luck follows the ambitious and when Donald Trump became president and began to talk of making Canada the 51st state of the US, Carney launched his campaign on strong nationalist lines.
Up to then, the opposition Conservatives under Pierre Poilievre had held a significant lead in the polls from the summer of 2023 to the beginning of 2025, but after Trump’s blusterings, Carney has been able to turn things in the Liberals’ favour, particularly as the Conservatives had gone ‘Trumpist’ in their policies – a big mistake after Trump talked of ending Canada’s sovereignty. By his blatant appeal to Canadian nationalism, Carney has been able to garner the support of most of those who usually vote for the labour-leaning New Democrats and the French-nationalist Bloc Quebecois.
In so many ways, Carney is like a Canadian Mario Draghi that Italy and Europe have continually looked to provide leadership. Both were ex-Goldman Sachs; both were central bankers and both became heroes of capital – Draghi for Europe and now Carney for Canada. It seems that in some countries when the ruling class gets in trouble, it turns to the ‘money men’ to bail them out. Alongside his nationalist anti-Trumpist rhetoric, Carney has adopted the usual neo-liberal economic formula: tax cuts and government spending cuts as the solution to the country’s economic problems. As for Carney’s economic ideas, read my old post here. https://thenextrecession.wordpress.com/…/mark-carney…/
And there are plenty of problems. Given the state of the Canadian economy and the ranting from the White House, Carney will have his hands full if he wins. Of the top seven (G7) capitalist economies, Canada is the smallest by GDP and population But it is the second-largest country by land mass, with the world’s longest coastline. It is bookended by the Pacific and Atlantic oceans, making it ideally situated for global trade (similar to the US). The country is energy independent, with the world’s largest deposits of high-grade uranium and the third-largest proven oil reserves. It is also the fifth-largest producer of natural gas. Canada boasts a huge supply of other commodities too, including the largest potash reserves (used to make fertiliser), over one-third of the world’s certified forests and a fifth of the planet’s surface freshwater. It has an abundance of cobalt, graphite, lithium and other rare earth elements, which are used in renewable technologies.
Despite these comparative advantages in natural resources, Canada’s GDP growth has long trailed its G7 peers, ranking just 16th globally in purchasing power parity terms. A country with its geography should generate higher output. But Canada’s capitalists have fallen behind in productive investment (outside energy) and in raising the productivity of their labour force.
Economic growth has been almost entirely driven by more people. In the 21st century, Canada has had by far the fastest population growth rate in the G7, growing at an annualized rate of 1.1 per cent—more than twice the annual population growth rate of the G7 as a whole at 0.5 per cent. In aggregate, Canada’s population increased by 30% compared to just 11.5 per cent in the entire G7. Adding one million people in one year to a base population of about 40 million is unprecedented. But Canadian’s standard of living, as measured by real GDP per person, is little higher in 2024 than in 2014 – a ten-year stagnation.
That’s because a massive slowdown in productivity growth. Over the decade prior to the pandemic, business sector productivity grew by a respectable rate of 1.2% annually. But since 2019, it has ceased to expand at all, setting Canada apart as one of the worst performing advanced economies.
Indeed, productivity growth within Canada’s goods-producing industries has not only slowed but has reversed. As a result, the goods sector has subtracted an average of 0.4 percentage points from Canada’s overall productivity growth every year since the pandemic.
The main reason for this collapse in productivity growth is that investment growth in productive sectors of the economy slowed towards zero. As Canadian Marxist economist, Geoff McCormack says, “given poor profitability, lacklustre capital accumulation, truncated capacity utilization, low employment and low real wage growth, it is unsurprising that real GDP growth, too, was weak.” Instead, there has been a credit-fuelled boom in housing. With a population of just 40m, Canada is one of the world’s least densely populated countries. But remarkably, it also has one of the developed world’s worst housing shortages. Average house prices have tripled in the past two decades, with high mortgage debt straining consumer spending
The investment rate has fallen because of a sharp fall in the profitability of Canadian capital. The trajectory of the Canadian profit rate has always been driven significantly by the crude oil price. In the 13-year period following the ‘Great Canadian Slump’ of 1990-92, the profit rate on Canadian capital rose. But after peaking in 2005, it began to fall rapidly, as the oil price fell, reaching a low in the pandemic slump of 2020.
Source: EWPT 7.0 series, AMECO, author
Between the years 1993 and 2005, the mass of profit grew by 142%. After 2005 and until 2019, however, it stagnated, having grown by merely 1.5% over the entire period.
Canada’s corporate sector is now weighed down by debt service costs with more than half of corporate income going to pay interest and principal payments on loans. Around 25% of Canada’s publicly traded companies can be considered as zombie firms ie. they persistently do not earn enough revenue to cover interest payments on their outstanding debts.
Canada increasingly relies on its production of oil and gas and other mineral resources. And so there is no drive to phase out fossil fuel production to save the planet. Previous Liberal prime minister Trudeau put it openly in a speech to cheering Texas oilmen a couple of years ago: “No country would find 173 billion barrels of oil in the ground and leave them there.” So Canada, which is 0.5% of the planet’s population, plans to use up nearly a third of the planet’s remaining carbon budget. Canada is failing by a long way to meet the net zero emissions target set for 2050 ( but then so are many other major economies).
Now President Trump is casting a dark shadow over Canada’s economy. Trump has announced increased tariffs on imports from Canada of steel and aluminium and threatens even wider tariffs. Canada is the largest supplier of both steel (with a turnover of $11.2 billion, to the US, ahead of Brazil, Mexico, South Korea and Germany) and aluminum ($9.5 billion). Trump has insisted “Canada would cease to exist as a country” without the US buying goods from it. “We don’t really want Canada to make cars for us, to put it bluntly. We want to make our own cars.” Trump said: “I have to be honest, as a (US) state, it would work great.”
Tiff Macklem, governor of the Bank of Canada, has said the US tariffs would probably put Canada in a recession: “Depending on the extent and duration of the US tariffs the economic impact could be severe; the uncertainty alone is already causing harm.” And “Higher US tariffs on the rest of the world will significantly weaken global demand and deepen the recession in Canada,” said Tony Stillo, Oxford’s director of Canada Economics and senior economist Michael Davenport. The Oxford economics say US tariffs on other countries will also weaken Canada’s exports, while “the trade war and pervasive uncertainty will paralyze private investment.” Oxford now expects a 1.3% pt peak-to-trough drop in GDP between the second quarter of 2025 and the first quarter of 2026. And it predicts Canadian house prices to fall 8 to 10 per cent by mid 2026 and 200,000 jobs to be lost, driving the unemployment rate to 7.7 per cent by the end of this year. Further down the road, Oxford forecasts GDP growth will average only 1.9 per cent a year between 2030 and 2050. In a worse scenario, where the trade war escalates, creating more barriers amid rising protectionism, growth could slow to just 1.1 per cent.
Carney says that: “The old relationship we had with the United States, based on deepening integration of our economies and tight security and military co-operation, is over. The time will come for a broad renegotiation of our security and trade relationship,” whatever that might lead to.
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