The outlook for Canada

The outlook for Canada

With new trade deal in place, Trudeau switches attention to domestic woes.

There was a long-awaited sense of celebration after Canada struck a last-minute deal to be included in the new NAFTA reboot. Yet the hard work is just getting started for Prime Minister Justin Trudeau as the country faces wider economic woes.

Wages are barely keeping up with the cost of living, business executives complain they can’t compete, and households are carrying record levels of debt.

Pressure is growing on Trudeau to act, starting with a budget update in the coming weeks, which could have implications for a variety of policies from how quickly he reduces deficits to the scope of planned corporate tax cuts heading into an election year.

There is fear among some, however, that there may be few short-term fixes, leaving the Canadian economy stuck permanently in a cycle of low growth and stagnating incomes.

So far, these problems have been masked by generous welfare benefits, financed by debt; workers tapping into their savings, a surge in immigration, and extremely low borrowing costs. The end result has been decent gains in national income that have been strong enough to prompt the Bank of Canada to begin raising interest rates. But according to experts, none of these drivers are sustainable.

Nowhere are the economy’s problems more evident than with the sluggish wage gains, which have barely moved since the beginning of last year — at just under 2.5 per cent. Inflation, however, has shot up on the back of gasoline prices and is expected to average about the same pace of wage growth this year. That will mark the second time in three years that pay after accounting for inflation — what economists call real wages — has been flat.

Economists aren’t exactly sure why wages are stagnating, particularly given the relatively low unemployment rate. Possible explanations include weak unions, a lagging economy, and an increasing dependence on older workers. But most analysts agree a slowdown in productivity is an important component.

This naturally poses a political challenge to Trudeau. The wages trend threatens to erode his record on a key pillar of his government’s agenda — reducing inequality and boosting incomes for the middle class. Canada’s business lobby has pressed Trudeau for corporate tax cuts to remedy the problem.

Executives argue weak competitiveness is curtailing investment and preventing them from paying higher wages, and warn the situation has only deteriorated since the US introduced its own tax cuts

Putting more of the economy’s gains into the pockets of corporate executives also requires a leap of faith that workers will feel the benefits — a tough pivot for the left-leaning Trudeau government, especially heading into an election year.

2018-11-05T17:38:08+00:00

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Anthony Moran
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