Mark Carney’s tenure as prime minister will continue as the Liberal Party won the most seats in Canada’s federal election on Monday. A Liberal government could mean considerable fiscal stimulus to stabilize the economy, an ambitious housing plan and a pledge to diversify trade partnerships amid ongoing uncertainty.
At a time when the economy is headed toward a downturn, an expansionary fiscal policy could prevent a recession and support growth while boosting productivity and forging new trade relationships. Carney previously spoke about establishing a new dynamic with the U.S. in the wake of its tariff policies and the vulnerabilities they exposed in Canada’s economy.
Depending on the outcome of the tariff dispute with the U.S., Canada could still narrowly escape a full-blown recession. In any case, fiscal stimulus would deliver a much-needed boost to the country’s gross domestic product this year and the next.
During the campaign, the Liberals pledged to run a total deficit of $225 billion over the next four years—focusing on capital investments in housing, infrastructure and clean energy rather than operating expenses. This is a welcome departure from Justin Trudeau’s tenure as prime minister because investments in capital tend to pay back in increasing productivity and growth without causing high inflation.
Carney is poised to lead a minority government—a scenario that comes with inherent challenges. The Liberals will have to work with other parties to get legislation passed, which can be tricky when a perceived strong hand and swift decisions are needed to address the ever-changing policy landscape.
Both the New Democratic Party and the Bloc Québécois favour even more fiscal spending—though this may not be a bad thing under current circumstances with extreme trade policy uncertainty. The loonie staying relatively steady is a sign that financial markets are not too concerned about the drawbacks of a minority government at this point.
As for the Bank of Canada, its focus appears to be maintaining price stability. With a more substantial fiscal stimulus package, there could be less pressure to further cut rates. We do not expect fiscal spending in capital and infrastructure to be inflationary at a time of economic downturn.
Trade policies
There is no question that trade is a major issue on Canadian minds—as is evident by the Buy Canadian movement.
After decades of close-knit trade ties with the U.S., Canada desperately needs to pivot quickly to de-risk from the extreme volatility south of the border. The Liberal government is in a position where it could work to strengthen and diversify trade relationships with Britain, the European Union and certain countries across Asia and Latin America.
As it stands, current retaliatory tariffs on the U.S. are expected to remain, including 25 per cent counter-tariffs on $30 billion of imports from the U.S. and matching 25 per cent tariffs on autos from the U.S. not covered by the countries’ free-trade agreement.
The Liberals also pledged to eliminate all federal barriers to interprovincial trade, a move that could inject billions of dollars into the economy and sets the stage for more domestic trade moving forward.
Housing
Housing is a thorny issue for Canadians, especially for millennials and Gen-Z as they enter a housing market where prices are detached from income due to nearly two decades of under-building.
The Liberals want to get into the business of building. Adding supply will be the most significant driver of affordable housing; if executed properly, this could seriously move the needle in supply and affordability.
The party pledged to create a new Crown corporation to fill the gap of affordable housing in Canada, some of which would be built on public land. This is the same policy that was introduced following the Second World War and continued into the 1970s, although its implementation this time will need to be different given higher land costs and stricter regulations.
Speeding up approval time is crucial and long overdue, as some Canadian cities have some of the longest approval time for construction projects in the world.
The Liberals also campaigned on eliminating GST for first-time homebuyers on homes up to $1 million. While this could help some prospective buyers, it does not encourage seniors to downsize from their larger homes to create inventory for younger families. It also might not increase supply substantially in the Greater Toronto Area and Metro Vancouver, where the median home price is above $1 million.
Energy
Based on the Liberal platform, Carney’s government could make hefty investments in clean energy projects. This is critical to ensure Canada remains a global energy player while solidifying the country’s energy security.
Developing domestic infrastructure to enable an increase in energy exports to Europe and Asia could play a key role in trade diversification as more than 90 per cent of Canada’s oil exports currently go to the U.S.
Carney already eliminated the consumer portion of carbon pricing, an issue that predated his appointment as Liberal leader in March, while maintaining the industrial portion.
Since the EU mandates a carbon price on imports and has a carbon border adjustment for countries that don’t have a carbon price, it would be beneficial to maintain the industrial portion to keep carbon pricing revenue in Canada while exporting to the EU.
Immigration
Immigration was another contentious topic for Canadians before U.S. tariffs dominated national attention. Immigration kept Canada out of a recession by buoying aggregate consumer demand back in 2023.
Nevertheless, it became clear that the post-pandemic years of higher immigration targets have exacerbated strains on housing and social services. The Liberal campaign platform pledged to cap non-permanent resident population at below 5 per cent.
In the long run, immigration will continue to play a vital role in Canada’s long-term growth. Without immigration, Canada would experience a severe workforce decline and a demographic cliff with an aging population, lower birth rates and fewer young people entering the workforce.
The takeaway
Canada is facing numerous economic challenges at home and abroad as extreme policy uncertainty and volatile global conditions continue.
An economic downturn and further unemployment are on the horizon, ongoing tariffs are poised to disrupt supply chains and bring about higher prices, while housing affordability remains a persistent concern.
But Canada’s economy has remained surprisingly resilience over the years. Fiscal stimulus, an ambitious housing plan and hefty investments in energy infrastructure might just be what the country needs to soften the blow, boost productivity and build a stronger economy in the months and years ahead.
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