Election signals, economic stress, and a world tour of expectations
Prime Minister Mark Carney meets with British Prime Minister Keir Starmer as he arrives in London on Monday, March 17, 2025. THE CANADIAN PRESS/Sean Kilpatrick
While a federal election call is expected tomorrow, the past week has already felt like the opening act of what may become one of the most extraordinary campaigns in decades.
The Liberals, suddenly favorites to retain power, made dozens of announcements just yesterday, including a suite of measures from Prime Minister Mark Carney: loosening access to employment insurance, allowing companies to defer tax payments, launching a new fund to support businesses affected by the trade war and a bunch of other things.
Conservative leader Pierre Poilievre, for his part, promised this week to restore apprenticeship grants, increase funding for training halls, and accelerate approvals for resource projects, among things.
The week began with Carney in London and Paris, trying to cast himself as a global leader—meeting with U.K. Prime Minister Keir Starmer and French President Emmanuel Macron.
It was meant to signal, to both the Trump administration and Canadians, that we have options in the face of American hostility.
Was the trip a success? Perhaps for Carney—who aimed to project a proactive stance and demonstrate his ability to build global alliances.
But as I wrote in The Hub this week, Canadians should temper expectations about how quickly Europe can become a meaningful trade alternative.
Diversification is a grind, not a quick pivot. Canada has had a free trade agreement with Europe since late 2017, yet the results have been underwhelming. In 2024, the EU and U.K. accounted for about 10% of Canada’s total exports—little changed from nine years ago. Investment flows between the regions have also lagged.
Why?
Geography, mostly. Our deep commercial ties with the U.S. create powerful inertia. Canada’s energy and manufacturing sectors are fully integrated with American supply chains. And globally, we’re not especially competitive in consumer goods.
There are also costs to trading more with Europe. In London, Carney reiterated that the EU is pushing ahead with carbon border tariffs. To keep trading there, Canada must maintain its own industrial carbon pricing regime, he said.
Our current pricing system, which Poilievre has promised to abolish, will allow exporters to receive credits that help offset most of these new tariffs—though not entirely.
“Guess what one of the requirements is to diversify trade with the EU?” Carney said. “A form of carbon pricing.”
But that’s just part of the story.
Because the U.S. doesn’t price industrial emissions, raising carbon costs at home could make Canadian firms less competitive in their most important export market.
Matching the EU on carbon may ease access to Europe, but it risks making business with the U.S. more prohibitive.
Dollar for dollar
In his London press conference, Carney also made a rare admission: Canada can’t go toe-to-toe with the U.S. in a trade war.
“There’s a limit,” he said, to how much Canada can retaliate—given the size imbalance between the two economies. While this appears to be an obvious admission - that economists have been saying for weeks - the remark raises important questions.
If retaliation isn't dollar-for-dollar, what is our strategy?
If tariffs won’t pressure the U.S. into reversing course, are they simply symbolic? Meant to deter escalation? Or to avoid appearing weak?
Or is the government betting the U.S. has a lower tolerance for economic pain?
If Carney is signaling that Canada can’t win a trade war, the case for even partial retaliatory tariffs weakens. Tariffs raise costs for Canadian consumers. They push inflation up, and keep upward pressure on borrowing costs for already-indebted households. And with retaliatory tariffs already proposed on $150 billion worth of U.S. goods, the public deserves a clear rationale.
Stagflation risk
The OECD’s latest global forecast, released Monday, paints a troubling picture of a Canadian economy that is drifting toward a stagflationary environment.
The trade war is expected to slow growth and push inflation back near 3%. The OECD now forecasts GDP growth of just 0.7% in both 2025 and 2026—down from 1.5% in 2024. That’s dangerously close to stall speed—too slow to create jobs and vulnerable to tipping into recession.
We heard a similar note of caution from the Bank of Canada last week, though the central bank’s updated forecasts won’t arrive until next month.
Inflation accelerates
Almost on cue, Statistics Canada reported Tuesday that inflation accelerated in February. The Consumer Price Index rose 2.6% year-over-year, the sharpest increase in eight months and a marked jump from January’s 1.9%.
The main culprit? The end of the GST holiday introduced in December.
The bad news is that even beyond tax effects, underlying price pressures remain sticky. Core inflation measures—which strip out volatile components—are still hovering near 3%.
Expect more volatility ahead. March will see another inflation bump from the GST holiday rollback. In April, tariffs may begin to push prices up further—though that will be offset by the elimination of the carbon tax on gasoline in some provinces.
The bottom line is that inflation pressures remain tilted to the upside. That will keep the Bank of Canada on edge.
In a Calgary speech, Governor Tiff Macklem signaled the central bank will proceed cautiously with rate cuts because of concerns about inflation.
“In that environment,” Macklem said, “we’re going to be proceeding carefully with any further changes to our policy interest rate.”
That may suggest rate cuts may be slower — and smaller — than markets hope. It also probably means no rate moves during the election campaign.
Housing weakness
The deteriorating economic outlook continues to weigh on Canada’s housing market.
According to new data from the Canadian Real Estate Association, national home sales dropped 9.7% in February—the largest monthly decline since May 2022. Year-to-date, sales are 3% below the monthly average for 2024.
Meanwhile, benchmark home prices edged down 0.8% in February to $712,000. That puts prices about 15% below their 2022 peak, just before the Bank of Canada began raising rates.
