Recent economic data has revealed a growing disparity between the economies of Canada and the United States, two nations long known for their close economic ties. Despite a history of parallel growth, the past few years have seen a significant divergence, with Canada’s economy lagging behind its southern neighbor.
According to a forecast by the International Monetary Fund as reported by The Economist, by the end of 2024, the US economy is expected to have grown by 11% compared to five years prior, while Canada’s growth is anticipated to reach only 6%.
This gap becomes even more pronounced when accounting for population growth, with Canada’s per capita national income falling to approximately 70% of the US figure by 2025, a marked decline from its previous 80% standing.
Several factors contribute to this economic divergence. While both countries experienced economic contractions due to COVID-19, the US has shown a more robust recovery since 2022.
Canada’s economy has been more acutely affected by rising interest rates, partly due to the prevalence of shorter-term mortgages compared to the 30-year fixed-rate mortgages common in the US. This sensitivity is compounded by the fact that Canadian households carry a higher debt-to-income ratio than their US counterparts, making them more vulnerable to economic pressures.
The shift in US consumer spending back to services has impacted Canada’s export-oriented manufacturing sector, creating challenges in the services sector. Additionally, Canada’s oil industry has seen slower growth compared to the booming US shale oil sector, affecting a key component of Canadian exports. These energy sector disparities have further widened the economic gap between the two nations.
Productivity concerns also play a role in this divergence. Canada has experienced sluggish growth in output per hour worked for two decades, falling behind the US in sectors like technology. This long-term trend has hindered Canada’s ability to keep pace with US economic growth.
Lastly, while Canada has traditionally benefited from high immigration rates, recent trends suggest challenges in integrating a surge of temporary residents and international students into the workforce effectively. This shift in immigration dynamics has added complexity to Canada’s economic landscape.
These factors have contributed to a rise in Canada’s unemployment rate, reaching 6.6% in August 2024, up from 5.1% in April 2023. In response, the Bank of Canada has implemented interest rate cuts, but the impact on heavily indebted households remains a concern.
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