Canada Economy Facts and Outlook

The Struggling Economy Was Why Justin Trudeau Became Prime Minister

Justin Trudeau
••• Photo by Samir Hussein/WireImage/Getty Images

Canada's economic output as measured by gross domestic product (GDP) was $1.93 trillion in 2019. This was just one-tenth that of its primary trading partner, the United States ($21.37 trillion) and slightly less than its other NAFTA partner, Mexico ($2.6 trillion). The trilateral trade bloc of North America, NAFTA, is an acronym for the North American Free Trade Agreement.

These measurements use purchasing power parity to take into account the discrepancy between each country's standard of living. You really shouldn't compare countries or economies without it. 

Canada’s 2019 GDP growth rate was 1.7%, slower than those of the United States (2.3%) but higher than Mexico where the economy shrank by -0.1%. Canada's standard of living, as measured by GDP per capita, was $46,194. That's lower than that of the United States ($65,118) but higher than that of Mexico ($9,863). 

Canada is roughly the same size as the United States, at 3.85 million square miles. But it only has one-ninth the people, about 37.7 million. It's about five times the size of Mexico, with just over a quarter of the people. Why is Canada so sparsely populated? Climate. Its northern half is so cold for so much of the year that the ground remains permanently frozen. As a result, roughly 90% of the people live within 100 miles of the US border.

Almost 50% of Canada's land is locked up in permafrost. That may change with as a result of global warming.

Canada has more fresh water than any other country. It has around 2 million lakes. Most of it cannot be used for productive uses, such as hydropower or even irrigation. Only 4.7% of Canada's land is suitable for farming, compared to 16.8% of land in the United States and 12.9% in Mexico.  

Trudeau and Trump

On April 24, 2017, the Trump administration announced new tariffs on Canadian lumber of up to 24%. That would affect around $5.8 billion in exports. Western provinces allow loggers to cut trees on government-owned land. The U.S. Commerce Department says the reduced rates allow for trade dumping.

The threat alone has reduced imports of Canadian softwood lumber. The tariff would be retroactive. Many companies hesitate to purchase lumber that could face as much as a 24% surcharge.

The Commerce Department must prove to the U.S. International Trade Commission that Canada's actions injure the American lumber industry. In 2004, a NAFTA panel said the United States did not prove the dumping had harmed the American lumber industry. 

On April 26, 2017, President Trump signaled the United States may withdraw from NAFTA before backtracking just hours later. That follows his administration's stated intent to renegotiate NAFTA. The President argues that the current agreement gives too much away to Mexico. Canada's Prime Minister Justin Trudeau said he would be willing to negotiate a separate bilateral agreement with the United States. ​

Trump also withdrew the United States from the Trans-Pacific Partnership. Trudeau and the other signatories are moving forward with the agreement, even without the United States.

Canada's Economy Depends on the United States

Canada is the 12th largest exporter in the world according to the World Bank. In 2019, it exported C$592 billion in goods or around US$455 billion. Three-quarters of this goes to the United States. Trade with the United States and Mexico has tripled since 1994, thanks to NAFTA. Canada is America's largest supplier of energy. That includes crude oil, petroleum products, natural gas, and electricity.

Canada struggles to overcome another geographic handicap. It doesn't border any countries other than the United States. This makes shipments of goods to other markets more expensive.

Canada benefited from the discovery of oil sands in Alberta. That gave it the third largest oil reserves in the world at 167.7 billion barrels. It's behind Saudi Arabia and Venezuela. It ranks twelfth in the world in recoverable shale oil and fifth in shale gas, according to the U.S. Energy Information Administration. Canada is now the third largest oil exporter. It ships 3.7 million barrels a day. 98% of its oil exports go to the United States.

On the other hand, Canada's reliance on oil exports may throw it into a recession. In 2014, oil prices drastically fell from over $100, bottoming out at $31 in 2016. Canada's central bank cut interest rates to stimulate the economy, but that may have aggravated a housing bubble. The government could spend more, but the debt-to-GDP ratio is already high at 89.7%. 

That's why Canadians elected Justin Trudeau as the new Prime Minister. He is the son of charismatic former Prime Minister Pierre Trudeau. His election reflects a demographic shift toward liberalism. In the 2015 election when he rose to power, the youth voter turnout among those aged 18–24 increased from 38.8% to 57.1%.

Trudeau promised to spend C$60 billion in new infrastructure. This will increase the budget deficit. But that might be paid for with taxes on marijuana, which Trudeau plans to legalize. 

Future Outlook

Trudeau also agreed to cut greenhouse gas emissions. That could reduce oil sands production. It would trigger lawsuits from companies that invested billions in development.

Longer growing seasons already allow farmers to grow crops such as corn that they never could before. For example, an acre of farmland in Alberta, Canada, sold for five times what it did 10 years ago. Temperatures in the province have warmed by 3.6 degrees Fahrenheit since 1950, making the growing season two weeks longer.

A 2019 government study found that Canada is warming twice as fast as the rest of the world. It warned of coastal flooding, droughts, and wildfires.

Over the next 40 years, climate change might benefit Canada. Over the course of the 20th century, the area of the Arctic's largest ice shelf fell 90%. Over the past 30 years, the Arctic has warmed at twice the rate of the rest of the world. As a result, the Northern Sea Route and the Northwest Passage may open to commercial traffic as ice continues to melt. That could compete with the Panama Canal by 2050.