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February 3, 2025

News in Charts: Trudeau’s successor’s inheritance

by Fathom Consulting.

Similar to events in France and Germany, Canada also faces political upheaval, and reached a tipping point with the resignation of finance and deputy prime minister, Chrystia Freeland, on 16 December 2024. Shortly after, on 6 January 2025, Prime Minister of Canada for over nine years, Mr Trudeau, announced his intention to resign as Prime Minister and Liberal Party leader. He also announced the suspension of parliament until March, while the Liberal Party decides on its next leader. The next Canadian federal election is due by 20 October 2025 and will probably occur earlier as a vote of no confidence may be triggered. Early polls indicate Pierre Poilievre’s Conservative Party currently hold a lead of at least 20 points over the Liberals. Growing support for a more right-wing option in government is part of a growing global trend among western democracies such as France and Germany where Rassemblement National (RN) and Alternative for Germany (AfD) are expected to gain significant consensus in their respective, upcoming elections.

As Canadians prepare for a new election, they will need to contend with some of the more pressing economic problems that have also been afflicting other western economies. Fixing a weak productivity trend is one such issue, and an essential one to ensure long-run economic growth and improving living standards. In the absence of sustained productivity growth, competitiveness will be eroded, workers could face wage stagnation, with the government ultimately limited in their ability to raise the required revenues to sustain commitments without invoking spending cuts or higher taxes.

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Looking at drivers of growth, Canada’s working age population has continued to increase, despite its fertility rate being below the replacement ratio for over 50 years. This is a result of positive net migration, which has been a consistent engine behind the country’s ability to maintain a growing labour force. Under Mr Trudeau, a surge in net migration has fuelled a significant bump up in Canada’s labour force, as the economy reopened after the COVID pandemic and at the same time unemployment reached all-time lows.

While the surge in migration helped to address labour shortages, the unemployment rate has started to rise, leading to the government recently curtailing its immigration targets. The Environics Institute surveys revealed a clear change in public opinion around this issue: in September 2022, 27% agreed there was too much immigration and 69% disagreed, while in September 2024 the respective results were 58% and 36%.

Some of the public concerns that supported the change in mood around migration included increased pressure on public services, house and rent prices, and employment, according to the survey.

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Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in LSEG Workspace.

Housing affordability has been an increasing source of popular discontent and diverted resources from more productive allocation. Another survey from Abacus Data places housing at the centre of the next election campaign, with 77% of respondents reported as being dissatisfied with the federal government’s handling of the housing crisis. The chart below shows how Canada is one of the least affordable housing markets, especially in the last decade.

 

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Lofty property valuations have likely been part of the reason behind the Bank of Canada’s faster easing cycle relative to its G7 peers. It has delivered a cumulative 200 basis points worth of cuts since June 2024, including a 25 basis points cut on Wednesday. Such a fall in the cost of capital may help encourage private investment, soften the housing downcycle and alleviate debt servicing costs by placing Canada on a more favourable cyclical backdrop.

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Alongside structural issues pertaining to housing and weak productivity growth, Mr Trudeau’s successor will inherit the return of Mr Trump for his second term in the Oval Office. Mr Trump has reiterated his intention to impose 25% tariffs on Canadian imports, possibly a means to highlight Canada’s US dependency, which will add to its incumbent domestic pressures. While Canada enjoys a trade surplus with the US worth around 2% of Canadian GDP, this is predominately due to exports of oil and fuels. Stripping out this component, Canada actually sports a trade deficit with the US, worth about 1% of its GDP. Seen in this light, the merits of imposing tariffs on Canada on the premise of achieving a more favourable trade relationship for the US might end up being counterproductive. Ultimately, it is becoming increasingly apparent that the threat of tariffs are being used as a negotiating tactic by the Trump administration to extract concessions in other areas. The same may be happening here.

 

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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