By almost every measure, Canada’s economy is stuck in a ditch. Growth has failed. The unemployment rate is increasing.
In normal times, the rowingdy is clear. The Bank of Canada cuts interest rates and the federal government increases spending to help businesses and households weather the storm.
These are definitely not normal times.
And Bank of Canada Governor Tiff Macklem knows it.
“The structural damage caused by tariffs is reducing our productive capacity and adding costs. This limits the ability of monetary policy to boost demand while maintaining low inflation,” Macklem said last week.
Lowering interest rates can only do so much, he says. And in this exceptionally strange time for the Canadian economy, he says there is a limit to monetary policy.
“You can’t target specific sectors. You can’t target the most affected sectors: aluminum, steel, automobiles. You can’t help companies find new markets. You can’t help companies reconfigure their supply chains. What you can do is try to mitigate the contagion effects from the most affected sectors to the rest of the economy,” he said.
The Bank of Canada made a 25 basis point cut to its key interest rate, while Governor Tiff Macklem suggested rates will stay where they are as long as inflation remains in the two per cent target range.
There is a clear message in that statement. Not just for Canadians struggling to stay afloat in these difficult times. Economists say Macklem is sending an important signal to the federal government.
“The Bank seems to think it has done everything it can and is now handing the reins to the federal government to support the economy through fiscal policy,” says David-Alexandre Brassard, chief economist at Chartered Professional Accountants of Canada.
That fiscal policy will be presented for everyone to see on Tuesday.
Randall Bartlett, Desjardins’ deputy chief economist, says the budget itself will be unprecedented.
“It is unprecedented not only in its delay, but also in its planned spending, tax cuts and savings. Deficits could rise to levels not seen in decades outside of a recession or pandemic, and the debt-to-GDP ratio is likely to head in the wrong direction,” Bartlett wrote in a budget preview last month.
The question, of course, is whether the budget can do what the Bank of Canada cannot.
“It’s certainly possible,” says Benjamin Reitzes, CEO of BMO Economics.
He says it’s clear the Bank of Canada has done what it comfortably could do. Now, he says, the focus is on the federal budget.
“They are passing the baton to the fiscal authorities, which in this case is the federal government. We will see what is in this budget. I think there is a lot of optimism around possible new measures to stimulate growth,” Reitzes said.
Driving growth is the heart of the matter.
Growth has been a problem for years. Long before Donald Trump returned to the Oval Office and Before U.S. tariffs caused so much damage, Canada was struggling to attract investment and spur economic growth.
GDP per capita fell dramatically. Between 2014 and 2022, average growth in Canada ranked third lowest among OECD countries.
Above all, Reitzes says this week’s budget is an opportunity to reset Canada’s economic priorities.
“It’s time to approach the economy and economic growth differently than we have in recent years and focus much more on how to expand Canada than anything else,” Reitzes said.
That is why the expense itself is important. Canada has pledged billions of dollars in new defense spending. It has already allocated billions more to the Major Projects Office and the diversification of commercial corridors.
But every budget is a mix of accounting and storytelling.
The numbers say one thing, the text of the document sometimes tells another story.
Reitzes says the challenge in this week’s budget will be ensuring that everyone, from Canadian workers and businesses to pension funds and investors around the world, hears a clear message from the government.
“We are ready to grow the economy, we are focused on the things that Canadians need to have a better life and those priorities are not the same as they have been for the last 10 years,” Reitzes said.
