No one would call these the best of times for the Canadian economy.
But they aren’t the worst of times, either. The Bank of Canada’s (BoC) recent decision to hold interest rates steady rather than cutting them again signals that the economy is stronger than the current gloom suggests.
The BoC isn’t alone in noting the “resilience” of the Canadian economy in withstanding damage from the U.S. tariff war.
“Canada’s economy has held up better than expected despite a significant external trade shock,” the International Monetary Fund (IMF) said in its latest report on Canada, released early this month.
The IMF, like many Canadian economists, credited government stimulus this year for some of that economic stability.
The BoC isn’t raising false hopes about an outlook still clouded by uncertain prospects for a renegotiated free-trade deal with the U.S. and Mexico next year.
U.S. President Donald Trump has hit Canada hard with “sectoral” tariffs on U.S. imports of Canadian steel, aluminum, autos and lumber.
Most Canadian exports to the U.S. enter that country tariff free because they comply with country-of-origin rules in the Canada-U.S.-Mexico Agreement (CUSMA).
But the fate of CUSMA, which comes up for review next spring, is in limbo. The White House is suggesting that the U.S. might split the deal into separate agreements with Canada and Mexico.
CUSMA is one of the world’s largest free-trade regions, a deeply integrated super-economy whose dismantling would be chaotic.
We have to hope the Trump administration recognizes that U.S. manufacturers and farmers reliant on Canadian inputs — everything from Canadian components for F-35 fighter jets assembled in Texas to the fertilizer derived from Canadian potash used by U.S. farmers of all types — would struggle to find alternative sources.
It’s the precarious trade situation with the U.S. that prompts BoC Governor Tiff Macklem to warn that “uncertainty remains high and the range of possible outcomes is wider than usual. If the outlook changes, we are prepared to respond.”
That’s true. The BoC’s current policy rate of 2.25 per cent provides a lot of “dry powder” for the BoC to stimulate the economy with further cuts in borrowing costs if necessary.
The BoC’s policy rate was 0.25 per cent as recently as March 2022. The BoC’s caution in not declaring victory over inflation and lowering rates further enables it to provide monetary stimulus in a worst-case scenario.
That would be a White House decision to scrap CUSMA or negotiate a trade deal with Mexico that leaves Canada in the cold.
But for now, the Canadian economy is outperforming expectations.
In the third quarter, Canadian GDP grew by an astonishing 2.6 per cent.
That was an unusually big swing, from a second-quarter decline in GDP of 1.8 per cent.
Normally that kind of bounce would suggest the beginning of a boom. One quarter doesn’t tell a story, but it’s a welcome tailwind as we head into an uncertain 2026.
And it means Canada has avoided a recession. That makes more than two years in which a forecast recession has failed to occur.
It’s the same story with employment, widely expected to have cratered by now after months of economic pummelling by the U.S. Instead, Canada added another 54,000 jobs in November, in contrast with a predicted job loss of 2,500 positions.
“That’s a pleasant surprise,” wrote TD economist Andrew Hencic in a client note of a jobless rate that has fallen to 6.5 per cent last month from 7.1 per cent in September.
“The takeaway has to be that the Canadian labour market is in better shape than most had thought,” Hencic wrote.
Like Canadians, Americans are afflicted with a cost-of-living crisis. Trump recently tried to reassure Americans who can’t afford daily necessities that his administration is “crushing” inflation.
But U.S. inflation is running at an annual rate of three per cent, compared with Canada’s 2.2 per cent in October.
Here at home, Microsoft chose Canada rather than the U.S. for a $7.5-billion investment in its artificial research ambitions over the next two years. The decision, announced Dec. 9, adds to the $11.5 billion that Microsoft has invested in data centres and cloud computing in Canada since 2023.
That marks a geo-economic shift, according to George F. Will, the veteran U.S. political commentator. With its political stability compared with the U.S. of recent times, Microsoft chose to expand its Canadian operations “because Canada presented itself as a nation capable of anchoring the future of digital infrastructure,” Will said.
Canada, Will said, is becoming a strategic, or first, choice for foreign investment rather than an alternative one. Tech giants Ericsson and Nokia also stepped up their Canadian investments this year.
The elevated status of Canada as an attractive base for global technological development means more than the economic noise of the moment.
