Trudeau's economic hopes face new challenges as caucus gathers
Prime Minister Justin Trudeau pictured at a caucus meeting earlier this spring. ‘As the macroeconomic picture improves, so too will the government’s fortunes. Now, heading into a pivotal caucus meeting this week, there are signs that this long-promised improvement may finally be materializing,’ writes Theo Argitis. THE CANADIAN PRESS/Sean Kilpatrick
For over a year, as Liberal poll numbers have declined, Prime Minister Justin Trudeau’s team has been pushing a central message, almost an article of faith, that better times are ahead for the economy.
The argument is that as the macroeconomic picture improves, so too will the government’s fortunes. Now, heading into a pivotal caucus meeting this week, there are signs that this long-promised improvement may finally be materializing giving Trudeau a more compelling economic story for Canadians.
Inflation is at its lowest level in more than three years, and the Bank of Canada has begun what’s expected to be an aggressive cycle of interest rate cuts that should give the nation’s sluggish economy and its indebted households a lift.
The coveted soft landing — where inflation is brought under control without a major recession — remains within reach.
Yet, despite these positive signals, clouds still loom and the plane has yet to land, as Bank of Canada Governor Tiff Macklem said at a press conference last week. It’s still to be determined if the long-awaited economic recovery can deliver the political boost Trudeau desperately needs.
Since April, monthly GDP data show an economy that has flatlined over the summer. The labour market, meanwhile, is looking precarious with the jobless rate climbing and employment stalled.
Affordability remains top of mind for many Canadians, but the labor market could become the government’s biggest headache in coming months as we transition from “sticky inflation” to “sticky unemployment.”
Rising unemployment
The jobs market remained robust through much of the economic weakness we’ve seen over the last year, but demand for workers has suddenly dried up.
Canada created over 400,000 jobs last year and nearly 200,000 in the first five months of 2024 — a solid result by any measure. But since May, the country has added only 18,000 net jobs—the weakest stretch of employment growth since 2022.
The impact of this weakness has yet to spread widely; it’s mostly affecting newcomers and young Canadians, while most others haven’t felt it much.
For example, the unemployment rate for Canadian-born workers aged 25 to 54 years old has increased by one percentage point since the end of 2022 to about 4.4 per cent — which is still below average over the past decade. For young recent immigrants to Canada, the unemployment rate has increased almost 10 percentage points since the end of 2022 to above 20 per cent.
While employers aren’t adding new workers, they aren’t laying them off either in large numbers. Also, wages continue to increase at an above-inflation clip.
The employment data aren’t disastrous, in other words.
But in the current context of fast population growth, even sluggish employment growth is very worrying.
A surge in immigration numbers — both temporary and permanent — has created a potential glut of workers. When the labour market is strong, this influx poses a manageable challenge, but when demand weakens, it can become a serious problem.
In response, the government is scrambling to reverse policies that led to the surge in temporary foreign workers and students. There’s even talk of scaling back permanent resident numbers to provide relief on the supply side. Meanwhile, the Bank of Canada has begun easing monetary policy to stoke demand for workers.
The entire exercise, given its unprecedented nature, is steeped in uncertainty. No one knows how it will pan out. Immigration policy is not meant to be a tool to fine-tune demand for workers, as the government has quickly realized.
Falling oil prices: A double-edged sword
Oil prices have plunged in recent weeks — down 20 per cent since early July — on growing concerns about global economic growth. While this will come as a relief to consumers and help keep inflation on a downward trajectory, it’s not good news for Canada’s economy. Falling oil prices will only heighten concerns about slowing growth.
Ironically, under Trudeau’s administration, which hasn’t been considered particularly friendly to the oil sector, Canada has become more reliant on oil as an engine of growth. The opening of the Trans Mountain pipeline and strong oil prices until recently have helped.
In July, oil shipments accounted for more than 20 per cent of total merchandise exports, only the seventh time in the past four decades that oil exports have surpassed that threshold in any one month. Between January and July, oil made up 17.6 per cent of all exports, compared to less than 10 per cent in 2016, Trudeau’s first full year in power.
Capital spending in the oil and gas sector totaled $22 billion in the first half of this year, about 18 per cent of total business investment in the country, which is up from 16 per cent in the same period last year.
These numbers still pale in comparison to a decade ago when oil and gas companies spent $78 billion on capital in 2014 alone, representing one-third of all Canadian capital expenditures that year.
Corporate bashing continues even as profits shrink
Corporate bashing continues to be alive and well in Ottawa, based on NDP Leader Jagmeet Singh’s rhetoric on why he dropped his power sharing agreement with Trudeau’s Liberals. “Big corporations and wealthy CEOs have had their government. It’s the people’s time” is how Singh put it in a post on X.
We’ll likely continue getting shades of this sort of rhetoric from all political parties in coming weeks and months as elections approach. But recent data suggest attacking companies for excess profits is becoming less sound.
Corporate profits, as measured by pre-tax corporate income in national accounts, totaled just under $150 billion in the first half of 2024 — the lowest profit level since the start of the pandemic. As a share of national income, profit made up only 10 per cent in the first six months of the year, well below the historical average of 12-14 per cent.
Meanwhile, the share of the economy going to labour hit 53 per cent — the third-highest quarterly share in a decade. For Canadian corporations, the economy is not only slowing, but their share of the pie is historically low — something that doesn’t bode well for future capital spending.
