The Current - Why Canada’s economy is showing resilience

Episode Date: August 26, 2025

Grocery bills keep climbing. Young people are finding it hard to find work. And Trump’s trade war has had experts bracing for the worst for months now. But so far, the Canadian and U.S. economies are holding up better than expected. We’ll hear from RBC Chief Economist Frances Donald on what’s happening here at home and from Ernie Tedeschi, director of economics at the Budget Lab at Yale University, on what Trump’s trade war has meant for the US economy.

On the 80th anniversary of the liberation of Auschwitz, comes an unprecedented exhibition about one of history's darkest moments. Auschwitz, not long ago, not far away, features more than 500 original objects, first-hand accounts, and survivor testimonies that tell the powerful story of the Auschwitz concentration camp, its history and legacy, and the underlying conditions that allowed the Holocaust to happen. On now exclusively at ROM.

Tickets at ROM.com. This is a CBC podcast. Hello, I'm Matt Galloway, and this is the current podcast. Are the elbows coming down? Last week, Prime Minister Mark Carney announced he was removing retaliatory tariffs on goods from the United States that are covered by the Canada-US-Mexico agreement, or Kuzma. The situation we're in now is that Canada and the United States have re-established free trade for the vast majority of our goods.

Canada will retain our tariffs on steel, aluminum and autos, as we work intensively with the United States to resolve the issues there. Canada has been in a trade war with the U.S. since February, one that intensified last month when U.S. President Donald Trump imposed 35 percent tariffs on some Canadian goods. Along the way, many have sounded the alarm that this ever-expanding trade war would tank the economy, that the sky would fall. So has the sky fallen? And if not, why? Today we have a cross-border explainer for you on how both the Canadian and U.S. economies are faring. In a moment, we'll hear from the former chief economist at the White House Council of Economic Advisors. But first, I'm joined by Francis Donald. She is chief economist of the Royal Bank of Canada. Good morning, Francis Donald. Good morning. Thanks for having me.

Well, we're glad to have you. And to understand where we are, where we're going, let's go back to where we're. we started. February 1st, Donald Trump imposed his 25% tariff on most Canadian goods. How worried were you at that time about what would happen to the Canadian economy? It was a worrying time as a Canadian, but also as a Canadian economist, because we were running a range of scenarios, some of which were very dire, recessions that could last a year or longer, unemployment rates that could have in many dire scenarios run as high as 10%. And so over that time, Canadians were hearing from a lot of economists and other experts that this could be a very serious economic shock, one that rivaled a financial crisis,

maybe not as bad as COVID, but was more likely to be sustained in nature. What's happened, however, has been very different, which is that instead of having all exports to the United States with a 25% tariff, there's a very small share of exports. that are heading to the United States that are currently being tariffed. Based on our calculations, only about 6 to 8% of exports heading to the United States are currently carrying a tariff. And that's a very different scenario than what we thought could have happened back in February. So when we laid out in February all the possibilities that could have happened,

we're currently in the best of those possible scenarios, excluding, of course, the idea that we could have come out with no tariffs at all. Right, but there's still a lot of pain in some key sectors of this Canadian economy. And how would you assess the risks that still remain because this tariff war is far from settled? Well, you're pointing out two really important elements of this story. And as much as we may look at some aggregate data, including today, there's Q2 GDP number that will come out and likely show Canada didn't do great, but it's surviving. that really masks two core stories. The first one is that there are sectors

and therefore regions of this economy that are really suffering. Steel and aluminum is being tariff, for example. And so the unemployment rate is quite high in places like Windsor, Ontario. It's near 11% right now. Ontario and Quebec are much more exposed to several of the tariffs that are in play.

So those provincial economies are feeling more pain than places like BC or Victoria, for example, where the unemployment rate is only around 4%. And so this trade war has come through, and it's created real pockets of pain for Canadians that need support now from the government and are looking for clarity. But the second issue at play isn't just a Canadian story. It's a global story, which is what is the evolution of trade going to look like? We still have to renegotiate Kuzma, of course, by July 26.

but it does seem as though the floor beneath our feet is shifting with respect to the entire concept of free trade. And it doesn't look like either Canada, the United States, Europe, or the rest of the world is heading back to what many of us learned in our textbooks, which is that free trade is the best thing for everybody. That notion is being substantially challenged. And we're only now in the very early phases of the experiment to see just how much that story is true. Right. And let's dig into two aspects of the economy. fundamental aspects. First, the jobless numbers and then inflation. Let's start with the jobless numbers. What are we seeing there and what are you expecting? So, you know, it's likely that the

worst of the job losses is mostly behind us. So to give you a sense, we think the unemployment rate is going to come out at the end around 7.7.1. So that deterioration in the labor market, the worst of it, probably going to start feeling a little bit better in the second half of this year. that's going to be rate cuts from the Bank of Canada that are starting to work their way through the system. And some of that uncertainty around trade should start to wean off just, you know, a little bit. We're talking about marginal improvements over time. The challenge, of course, as I noted, is that there are areas where job losses are much larger. Southwestern Ontario is a place where that joblessness is likely going to persist a little bit longer than you can see in those headline numbers when you turn on your TV or listen to the radio.

we're also looking for any evidence that that joblessness bleeds outside. So, for example, if you're working in a steel and aluminum plant and you've lost your job, you're less likely, for example, to go out to a restaurant or book a vacation. And that can pull down on employment in what we call those services sectors. So far, there isn't a lot of evidence that that's happened, but that's the big risk is that you see that joblessness start to bleed further out. And if that happened, then economists and the central bank would be having a very different sort of attitude towards the Canadian economy. And that's the main risk at this point. Right. And you talk about the spillover and that affects consumer spending. Consumers are telling pollsters that they're nervous about the economy.

And yet we're still spending. How do you look at that whole issue of people being anxious and worried but still spending? Inflation is still there. It's slowing, but we're still spending so much more on things like groceries.

This is such a fascinating dichotomy because over the past six months or so, we've saw one of the largest collapses in consumer confidence that much of our Canadian confidence data has ever seen, even sometimes as worse as what we saw during the pandemic. And yet when we looked at actual spending, it remained relatively flat. So what's going on? And this reminds me a lot of many of the things that we heard in the past two to three years. I would hear some folks say, you know, Canadian. are complaining, but they're going out to spend.

I think this misses a fundamental story, and that is that starting in about 2023, there's been a really big divergence in terms of the economy for low and middle income Canadians versus high-income Canadians. We've seen that over the past two to three years, low- and middle-income Canadians are indeed spending less. They are feeling that inflation in food and rent much more than high-income Canadians, and they don't have any excess savings left from the pandemic. like high-income Canadians do. So the challenge is that high-income Canadians spend a larger share

within the economy. So they make the numbers look better. If you really want to understand what's going on in Canada, you have to start segmenting it out to different groups and how their own individual experiences are reacting to this economy. And you'll find out that it's true, most Canadians actually are spending less and having a lot of harder time than what we see in the total numbers. So if the pain is not shared equally, as you just explained to us, How do you measure then a resilient economy? Well, that's two different stories. One of them is what does a GDP number tell you

that'll say how much money is flowing through the whole economy, but a GDP number isn't necessarily the best way to say how are everyday Canadians feeling in this particular economy. You've got to look at it more regionally than we have before. The Ontario economy is going to look very different from the Alberta economy this year. We have to think about what to renters versus homeowners feel in this economy. There's no one number that's going to encapsulate the whole. And we need

policymakers to really start thinking about, are we thinking about the right segmentation of the Canadian economy? And do we have the right policy who's targeting the right people? Well, on that point, you can imagine how hard it is to be the prime minister of this country. And Mark Carney is right now trying to drum up trade as he tours in Europe. How important is that, in your view, to what happens next? Well, I'd rather be the prime minister than I think the governor of the Bank of Canada, who is in more of a difficult position. He's only got one tool, interest rates up or down, that impact everybody singularity. But the governments, both at the provincial and the federal level, they are much better

positioned to really dive deep into who needs support now and getting it to them rather immediately. And this is the big challenge if you are working in government, is that there are these big structural trends that we know need to change in Canada, diversifying trade, for example, can we get more trade heading to Europe and be less reliant on Canada? That's an important theme, but it's not going to help Canadians next month. They probably need some form of transfer immediately or retraining. So governments are going to have to balance. What do we do in the short term to get us over this more challenging period and how do we, in parallel in concert,

work on some of the longer term trends that have to go at the same time? We need both in Canada, not just one or the other. And can I get a quick wrap from you? Are you optimistic about how we come out of all this? I am always optimistic with respect to Canada, but we also have to be a realist and recognize that as much as some of the headline numbers will say, we didn't come out as bad as we could have. There are still some things that we're going to need support from. Canadians are going to have to recognize that while they may be doing okay,

some of their neighbors may not. And more of a focus on one number, not encapsulating the whole story, is going to help Canada quite a bit. Thanks for helping us through this, Frances Donald. Thanks for having me. Frances Donald is the chief economist at the Royal Bank of Canada. On the 80th anniversary of the liberation of Auschwitz comes an unprecedented exhibition about one of history's darkest moments. Auschwitz, not long ago, not far away, features more than 500 original objects, first-hand accounts and survivor testimonies that tell the powerful story of the Auschwitz concentration.

cap, its history and legacy, and the underlying conditions that allowed the Holocaust to happen. On now exclusively at ROM. Tickets at ROM.C.A. Book club on Monday. Gym on Tuesday. Date night on Wednesday. Out on the town on Thursday. Quiet night in on Friday. It's good to have a routine. And it's good for your eyes, too. Because with regular comprehensive eye exams at Specsavers, you'll know just how healthy they are.

Visit Spexavers.cavers.cai to book your next eye exam. Iexams provided by independent optometrists. My fellow Americans, this is Liberation Day. April 2nd, 2025 will forever be remembered as the day American industry was reborn, the day America's destiny was we claimed, and the day that we began to make America wealthy again. It's been almost five months since Donald Trump imposed a slew of tariffs on the world, calling it Liberation Day. So how has the American economy fared since then? Ernie Tedesky is the director of economics at the Budget Lab at Yale University. He was also the chief economist at the White House Council of Economic Advisors in the Biden administration.

Good morning, Ernie Tedeski. Good morning. Thank you for having me. Well, let's start with how the American economy is faring five months into this trade war. I think that so far it is faring okay. We had a negative GDP print in the first quarter, but that was less due to the direct impacts of tariffs and more due to the anticipatory impacts of tariffs. So we saw a big increase in imports. and then consumer spending had front run the tariffs at the end of last year and so declined in the

first quarter, all of which came together and led the GDP contracting in the United States by a half a percentage point annualized rate. But then there was a little bit of a bounce back in Q2 near 3% real GDP growth that didn't make up for the loss that we had in the first quarter, but was a bit of a makeup. The labor market looks okay in the United States is still generally good. Now, we obviously had a very weak July jobs report for our payroll number, but the unemployment rate in the United States is still 4.2 percent, which even with the ticks up that we've seen recently, is still a very low level. It's called full employment, isn't it? It's much better than what we've got here in Canada at this point. I would say that we are a full

employment, it may be slightly below full employment economy still. All right. So in layman's terms, then, what's going on? There's fear. There's anxiety in some. There is anticipation in others in your economy that Donald Trump's plan is going to make America wealthy again, as he stated. How do you see the mission of these tariffs and what it looks like they're accomplishing so

far? Yeah. So I think the main mission of the. these tariffs, as stated by their advocates, is to reduce trade deficits in the United States on a bilateral basis. You know, I think that this is a ministry, essentially, but revenue generate. Well, I think that I think that's the second most important thing. I think they actually want to see more U.S. exports and fewer imports from overseas,

regardless of the tax revenue that they bring in. And it's had mixed success. It's had mixed success so far. It's actually a little too early to tell because there was. there was a big expansion in our trade deficit and then a contraction. Businesses and consumers are still sort of timing and feeling things out because the rollout of these tariffs, as I'm sure you all have felt in Canada, has been so chaotic and uncertain that American businesses and consumers, you know, don't know when the right time to buy is.

So, you know, the jury is still out on the trade data so far. I think the secondary effect is to bring in revenue. And I think there clearly it has brought in substantial revenue. We estimate year to date that the new tariffs imposed in 2025 have brought in $88 billion so far, which is substantial revenue. And unlike Canada, the United States fiscal trajectory is unsustainable over the long run with rising debt and deficits. So look, like that helps. And big tax cuts promised by the president and big spending in the so-called big beautiful bill. Well, that's another thing is that the only way that these tariffs are going to lower American trade deficits in the long run is if they either reduce investment or increase savings. And one way that you can increase savings is by reducing deficits. But to your point, all of the revenue that's been raised by these tariffs has already been claimed by the tax cut bill that was passed by Congress, that the 10-year projection of the revenue lost from the tax cut bill versus the revenue gained by these tariffs.

is almost exactly the same. So these tariffs, you know, when you look at all 2025 policy, including the tax cut bill, it really hasn't changed the American fiscal trajectory at all. Even though the CBO, the Congressional Budget Office yesterday, I think, said that were the tariffs to remain at the same level that they are projected to be now, it could mean as much as $4 trillion towards paying down the U.S. deficit over the next decade. That's exactly right. But the tax cut bill that Congress passed and the president signed would add $4.5 trillion to debt over the next 10 years. Yeah. So you use the word chaotic when you described how this whole thing has unfolded. And I think many people have felt and witnessed that. So how do we look ahead then? Because these risks of what may or may not happen with the tariffs is far from over. I mean, Canada's

still looking at renegotiating a trade agreement that the U.S. President has expressed sometimes outright disdain for. That's absolutely right. I don't think anybody here thinks that tariff policy is at its equilibrium point. I think that we all think that there are more changes coming. Some of them we can't anticipate. Like, we expect that there are going to be negotiations with Canada. We expect that there are going to be higher tariffs on pharmaceuticals.

for example, because that's a commodity tariff that they have signaled is coming, but they haven't released a final number yet. And then there are the unknown unknowns, right? Just the things around the corner that we can't anticipate like so much of the tariff policy this year. I will say, though, I think peak uncertainty for consumers and businesses was probably around April, maybe May. And uncertainty has come down a bit before. Really? I think especially, I do think. I think it has modestly come down since then. And you see this in consumer confidence surveys in the United States here, too. So for example, I think that we are probably around where we're going to be with our China tariff rate, right? And China, you know, other than Canada and Mexico, China is probably our next most important trading partner. You know, I would put the EU there too. So just the fact that we seem to be honing in on a stable rate with China has done a big, you know, has done. a lot for uncertainty here. You know, the details of the EU rate are mostly done. I think I think that beneath the hood, you know, there's more to negotiate there. But, you know, uncertainty is

quite a bit less than it was a few months ago. And so how in a quick wrap then, how would you sum up what you're expecting ahead for the U.S. economy? What I'm expecting is that these tariffs will be a big headwind for us. I think big headwind is like a half point off of growth, but not recessionary had win for the United States. Look, the United States will still be okay, but we will be poorer and less prosperous than we would have been otherwise. Well, on that note, I thank you for your time this morning. It's been useful to talk to you. We really appreciate it. Likewise. Thanks for having me. Ernie Tedeski is the Director of Economics at the Budget Lab at Yale University. He was also an economic advisor to former President Joe Biden.

You've been listening to the current podcast. My name is Matt Galloway. Thanks for listening. I'll talk to you soon. For more CBC podcasts, go to cbc.ca.ca slash podcasts.