Canada’s Economic Slowdown: Falling Behind the United States

(Analysis) Canada’s economy has long mirrored that of its southern neighbor, the United States. The two nations share a 9,000-kilometer border, facilitating daily trade worth $2 billion and the movement of 400,000 people.

This close relationship has historically led to synchronized economic growth. However, recent years have seen a growing divide between the two North American giants.

The COVID-19 pandemic marked a turning point in this economic relationship. While both countries experienced initial setbacks, their recovery paths have diverged significantly.

By the end of 2024, the U.S. economy is expected to be 11% larger than it was five years prior. Canada, under controversial Justin Trudeau, in contrast, will have grown by only 6% during the same period.

This disparity becomes even more pronounced when considering population growth. The International Monetary Fund predicts that Canada’s per capita national income will drop to just 70% of U.S. levels by 2025.

This figure represents a significant decline from the 80% ratio maintained in the decade before the pandemic. To put this in perspective, Canada’s economic standing among U.S. states has slipped.

Once slightly wealthier than Montana, the ninth-poorest U.S. state, Canada now ranks just below Alabama, the fourth-poorest state. This shift underscores the widening gap between the two economies.

Several factors contribute to Canada’s lagging performance. The service sector, which accounts for 70% of Canada’s GDP, has struggled to regain momentum.

While U.S. consumers initially boosted Canadian manufacturing post-pandemic, they have since shifted their spending to domestic services. This change has left Canada’s economy more dependent on its own service sector and domestic demand.

Canada’s Economic Slowdown: Falling Behind the United States

Canada’s higher interest rates have also played a role in its economic slowdown. Unlike the U.S., where most mortgages are fixed for 30 years, Canadian mortgages typically reset every five years.

This difference means that more Canadians have already faced increased mortgage payments due to rising interest rates. The oil sector, a crucial component of Canada’s economy, has underperformed compared to its U.S. counterpart.

Years of underinvestment following the 2014 oil price collapse have left Canada’s oil production growth lagging behind that of the United States. This disparity further widens the economic gap between the two nations.

Canada’s productivity growth has been sluggish for two decades, resembling European trends more than American ones. The country has largely missed out on the tech boom that has driven U.S. economic growth.

As a result, Canada’s GDP per capita has grown more slowly than all G7 countries except Germany since the pandemic. Immigration, once a reliable source of economic growth for Canada, now presents new challenges.

The country has welcomed record numbers of newcomers, but integration takes time. Many recent immigrants are classified as “temporary residents,” including low-skilled workers and students.

This influx has contributed to rising unemployment rates, which reached 6.6% in August 2024. The Bank of Canada has responded by cutting interest rates, but many borrowers still face higher costs.

The government has also introduced immigration restrictions, including a cap on international students. However, these measures alone won’t solve Canada’s chronic productivity issues.

Canada faces significant economic challenges in catching up to U.S. economic levels. The country must address its structural issues to close the growing gap with its southern neighbor.

Boosting productivity and navigating the complexities of high immigration are crucial tasks for Canada. The road ahead for Canada’s economy appears long and fraught with numerous obstacles.