Canada’s new Prime Minister Mark Carney has promised a tough approach to the United States, delaying the Trump administration’s tariffs and sovereign threats while spending domestically. But his fight with Washington could collide with economic reality: tariffs could put Canada in recession and require more government spending, not less.
Carney is an expert in managing the economic crisis after he replaced incumbent Justin Trudeau in the Liberal election after taking office on Friday (March 14). He previously led Bank of Canada during the 2008 financial crisis and Bank of England during the 2016-2020 banking period. Winning 85.9% of the votes of the Liberal Party members, he promised that Trump’s trade war would not threaten Canada’s sovereignty. “In trade, it’s like Canadian hockey,” he said in his victory speech earlier this month.
Earlier this month, the U.S. imposed a 25% blanket tariff on most Canadian imports. (The tariffs on cars and goods protected by the 2018 U.S.-Mexico trade agreement were later raised). Oxford Economics and Canada’s Desjardins Group is North America’s largest consortium of credit unions, and expects a 25% tariff on Canadian goods to plunge the country into recession. Since then, the Canadian government has retaliated against US $21 billion worth of U.S. steel and aluminum exports.
U.S. tariffs could be the last blow to Canada’s already sick economy. Calgary’s all-round asset management director Stephen Johnston is Canada’s main asset management group, and the country is already at a standstill: the economy grew only 1.2% and 1.3% in 2023 and 2024, respectively. Even before the tariff threat, Canada’s labor productivity was slowing, housing prices soared, and annual GDP fell in 2024. The OECD expects Canada to experience the lowest economic growth of now to 2060 of its 38 member states.
The economic picture depicted is inconsistent with Carney’s proposal to limit federal labor expansion, limit spending, balance budgets over three years, and operate only a “small deficit.” While it may help the Canadian government’s long-term balance sheet, modern Keynesian economics suggests that weakening economic trends require more investment and stimulus to start growing. These are the same major economies that ended the recession during the 2008 financial crisis and the COVID-19 pandemic – Carney is well aware that expanded the money supply and increased liquidity for the 2008 Bank of Canada governor.
Carney’s commitment to economic austerity is an attempt to balance the Liberal tradition of generous spending with the threat posed by the Conservatives’ cuts to the platform. Carney will face opposition leader Pierre Poilievre in October this year, which may end soon after his Premier League starts.
In a statement on March 12, Carney has agreed to “a position of respecting Canada’s sovereignty” with President Trump. Negotiations will be a key step to end the ongoing trade war between the two historic allies, but they only mark the beginning of a long road to Canada’s recovery.
