Canada's Election: Who Can Fix an Economy Under US Threat?

In the heart of Canada's political arena, the upcoming election is shaping up to be a high-stakes battle, with the country's economic future hanging in the balance. The productivity gap with the United States, a deindustrialized landscape, and a reliance on the U.S. economy have created a perfect storm of challenges that the next government will have to navigate. As the clock ticks toward election day, the question on everyone's mind is: who can fix an economy under US threat?

The productivity gap between Canada and the U.S. is a chasm that has been widening for decades. In 1970, Canada was the 6th most productive economy in the Organisation for Economic Co-operation and Development (OECD). Today, it has slipped to the 18th position. The gap stands at about $20,000 per person a year, putting Canadians' wages roughly 8% below their U.S. counterparts. This disparity is not just a matter of wages; it's a matter of investment. An investment of $1,000 in Canada’s main stock index in 2000 would have grown to $4,400 today, while the same investment in the U.S. S&P 500 index would be worth $6,000—a more than 35% difference.



The deindustrialization of many parts of Canada has cut into the country’s overall prosperity. Manufacturing is half what it was in 2000, while mining has also shrunk. Oil and gas—once powerhouses of investment and growth—are showing signs of renewed strength, but investment levels remain far below what they were a decade ago. Agriculture has been a rare standout, but it's not enough to offset the losses in other sectors.

The reliance on the U.S. economy is another critical factor. Canada's economic output per capita has fallen behind that of Australia and the U.S., with Canada being 30% less productive than the U.S. and closer to lower-income states like Alabama in terms of economic performance. This reliance is evident in the trade dynamics, where Canada is the largest export market for the U.S. and makes up one of the smallest trade deficits, owing largely to U.S. demand for energy-related products.

The U.S. trade deficit with Canada has deteriorated since Trump’s first mandate, reflecting the outperformance of the U.S. economy since the pandemic and a material increase in Canadian energy exports southward. This economic interdependence influences political strategies, as parties must address the potential risks and opportunities associated with U.S. trade policies and economic performance.

Political parties are likely to emphasize policies aimed at boosting productivity and reducing reliance on the U.S. economy. For example, the government's economic plan focuses on four key pillars: making generational investments to equip Canadians for success in the workforce, securing Canada's AI advantage, overcoming geopolitical risks, and ensuring Canada is leading in the global competition for capital needed for the industrial transition. These strategies are designed to address the structural challenges that exist underneath, such as the productivity challenge and the reliance on the U.S. economy. By focusing on these areas, political parties aim to create a more resilient and competitive Canadian economy, which is crucial for their electoral success.

The Canadian government has proposed several policies and initiatives to address the country's economic challenges, including the productivity gap with the U.S. and the deindustrialization of key sectors. Here are some specific measures:

1. Investment in Productivity and Innovation:
- The government is investing nearly $5 billion in Canadian brainpower to foster innovation and promote scientific breakthroughs. This initiative aims to ensure that Canada's best and brightest minds have the right tools and incentives to make cutting-edge discoveries, thereby boosting innovation and productivity across the economy.

2. Support for Clean Technology and Critical Minerals:
- The federal government's $94 billion suite of major economic investment tax credits supports power generation and the manufacturing of clean technology in Canada. This includes investing in critical minerals and metals supply chains, diversifying trade routes, and strengthening Canada's position as a global energy superpower.

3. Housing and Immigration:
- To address housing affordability, the government is accelerating home construction and supporting first-time home buyers, while balancing immigration with the supply of housing and jobs to raise living standards. These efforts not only benefit Canadians but also enhance Canada's appeal as a place to live and work, giving businesses confidence in their ability to attract talent.

4. Fiscal Management and Strategic Investments:
- Responsible fiscal management has helped the Bank of Canada to return its policy rate toward neutral levels. With stable inflation, the government can continue to pursue strategic investments aimed at supporting productivity and raising living standards. This includes making generational investments to equip Canadians for success in the workforce while reducing everyday costs, such as $10-a-day child care, free dental care, and prescription medications.

5. Trade and Supply Chain Resilience:
- The government is focused on deepening economic ties with trusted trading partners and ensuring supply chains are resilient. This includes countering the U.S. threat of tariffs while fostering a stable and competitive business investment climate. The government is taking a "Team Canada" approach in its defense of the national economic interest, aiming to be strong, smart, and united to succeed.

6. Support for Small Businesses:
- The government is encouraging business investment, including tax measures in the Fall Economic Statement, to support a non-inflationary acceleration of economic activity. This is part of the broader strategy to boost productivity and economic growth.

The stakes are high, and the clock is ticking. As the election approaches, the question remains: who can fix an economy under US threat? The answer will shape Canada's future for generations to come.