The 2025 federal election was always going to be about the economy. After years of inflation, soaring housing costs and growing red tape, Canadian voters seemed ready to punish the incumbent Liberals and their unpopular leader Justin Trudeau. Then Donald Trump returned to the White House and Mr. Trudeau exited the stage.
The election will still be fought along economic lines, but the ground has shifted. The U.S. President’s aggressive use of tariffs to strangle Canadian industries and rejig the global trading order has made the election about diversifying trade, protecting workers and rethinking Canada’s position in a fragmenting world. Cost-of-living issues remain top of mind. But they have been overlaid by new concerns about a trade war-induced recession and the longer-term viability of key Canadian industries.
Here are the key economic issues that will define the race throughout this month.
Trade
The last time trade with the United States topped a federal election agenda was the 1988 contest between Brian Mulroney and John Turner. Now, with the U.S. President menacing Canada with tariffs – imposing duties on steel, aluminum and automobiles, with more tariffs to come – trade has once again become the defining campaign issue.
The key question is who is best placed to handle Mr. Trump’s erratic and hostile trade policy – whether that’s fighting back or negotiating an updated continental trade pact. The United States-Mexico-Canada Agreement, which replaced NAFTA in 2020, is up for renewal next year and the Trump administration is likely to accelerate that process and drive a hard bargain.
The second issue is trade diversification. Canada sends around 75 per cent of its exports to the U.S. and has done so for decades, despite Ottawa signing 15 free trade agreements covering some 50 countries. With low-tariff access to U.S. markets no longer guaranteed, Canadian companies may need to look further afield in the coming years. Watch what the candidates say about strengthening commercial ties in Europe, Asia and elsewhere, and their plans for building transportation, port and pipeline infrastructure to get Canadian products to tidewater.
A cross-party consensus has emerged around the need to reduce interprovincial trade barriers. This initiative will necessarily be led by the provinces, but whoever takes power in Ottawa will play a crucial role convening the discussions and coaxing premiers to open their markets to one another.
Productivity
Before the trade war, arguably the main topic of discussion in Canadian economics was productivity – namely, how to improve it. The country’s gross domestic product per capita, after adjustments for inflation, is roughly the same today as it was in 2017.
It’s been a rough stretch for the economy, from shocks arising from the COVID-19 pandemic and higher interest rates that weighed on growth, to a population surge that’s bulked up the denominator in the per-capita calculation. Still, labour productivity – as measured by real GDP per hour worked – has been slipping for much of the past two years. Bank of Canada deputy governor Carolyn Rogers has gone so far as to label the situation an “emergency.”
Economists have seized on several culprits for the slump, including excessive red tape and meagre levels of business investment.
Housing
The housing market has been slumping for years – first because of higher interest rates, and lately because would-be buyers are scared off by the trade war. Still, from the vantage point of many Canadians, not much has changed: Prices and rents are prohibitively expensive in much of the country and construction is too weak to ease the supply crunch.
Canada Mortgage and Housing Corporation has estimated the country needs to build 3.5 million more homes than projected by 2030 to bring affordability back to levels in the early 2000s – or put differently, more than doubling the usual pace of construction. Needless to say, Canada is nowhere near that pace. Last year, developers broke ground on roughly 245,000 units, down from a recent peak of 271,000 units in 2021.
The federal Liberals brought in a series of measures to boost construction, but those efforts have been constrained by tighter monetary policy. Beyond the interest rate cycle, there are several factors weighing on home affordability, from excessive municipal development charges to sharply higher material costs. Fixing the crisis will require a deep commitment from all levels of government.
Inflation and interest rates
Inflation is a government killer. People despise rising grocery, gas and housing prices. Over the past two years, voters around the world have punished incumbent governments of all political stripes for the surge in inflation, and interest rates, that happened in the wake of the pandemic.
Since topping a four-decade-high of roughly 8 per cent in the summer of 2022, the pace of inflation has fallen back to normal. Annual Consumer Price Index inflation has been running close to the Bank of Canada’s 2-per-cent target since last summer and the central bank has cut interest rates seven times in a row. But slowing inflation doesn’t mean falling prices. Most goods and services remain much more expensive than before the pandemic while wages haven’t caught up for many workers. Interest rates remain higher than people had become accustomed to in the period between the 2008/2009 financial crisis and the pandemic.
Conservative Leader Pierre Poilievre built his successful 2022 leadership campaign around the issue of inflation and the fact that he identified it as a problem long before many economists and central bankers. New Liberal Leader Mark Carney, meanwhile, spent a large chunk of his career managing inflation as the head of the Bank of Canada and Bank of England (whose raison d’être is keeping prices stable). With cost of living still top of mind, and a trade war likely to cause another jump in prices, voters will have to decide who to trust to help keep inflation in check.
Employment
For much of the past two years, Canada’s labour market has delivered spotty results. The economy is churning out jobs – just not enough for all the newcomers joining the labour force. As a result, the unemployment rate – which hit a record low of 4.8 per cent in mid-2022 – rose to nearly 7 per cent by late 2024. It’s been especially tough for young people and new immigrants to find jobs.
More recently, there were signs of optimism. The jobless rate has ticked lower since November, part of a broader swell of economic momentum as the Bank of Canada eased borrowing rates. But that momentum could stall, owing to the trade war. Thus far, there are various anecdotes of layoffs in sectors directly targeted by the Trump administration, such as metals. It could, however, get a lot worse as the U.S. ramps up tariffs on Canada.
The uncertainty alone is forcing a corporate rethink. A sizeable share of companies surveyed by the Bank of Canada in February said they were scaling back their hiring and investment plans because of the tariff threats.
Fiscal position
The Liberal government blew the bank responding to the COVID-19 pandemic, and was slow in getting its finances back in order. Facing a new economic crisis, in the form of a trade war with our neighbour, Ottawa’s fiscal capacity will be once again tested. An economic slowdown could hit government revenues at the same time Ottawa ramps up support measures for businesses and workers. Increased defence spending seems imperative. Taken together, this is a recipe for larger deficits than previously projected, whichever party takes power.
Canada is in a comparatively good position by international standards. The country’s gross debt – which stood at 106 per cent of GDP in 2024 – is middle-of-the-road and nothing to be celebrated. But at only 14.6 per cent of GDP, the country’s net debt, which accounts for assets, such as funded pension plans, is very low. Canada has also been running smaller deficits than most of its G7 peers. However, it’s hardly been a picture of fiscal restraint; Ottawa spent the windfalls it received and ran sizeable deficits even while the economy was overheating and inflation was running amok.
Neither Mr. Carney nor Mr. Poilievre is running on a platform of fiscal austerity. With some variation, they’ve both promised to cut income taxes for middle-income Canadians and pledged to scrap the GST on new homes, while promising to maintain spending on social programs. Mr. Carney also scrapped the Liberal plan to increase the capital gains tax inclusion rate for businesses and wealthy individuals. Both say they’ll save money by trimming the civil service and finding efficiencies, but the math remains fuzzy.
Competitiveness
Mr. Trump’s economic agenda is all about hoovering up foreign capital, and drawing other countries’ businesses and jobs into the United States. For Canada to push back on this, it needs a more competitive business environment. That means trimming the thicket of regulations that, while often well-intentioned in the pursuit of environmental, health and consumer protection goals, is choking off business investment and dampening corporate dynamism.
A Statistics Canada report from February found the number of regulatory requirements faced by Canadian businesses jumped 37 per cent between 2006 and 2021. That red tape has imposed a real burden on the economy, the study said. It estimated that the growth of regulations trimmed 1.7 percentage points off GDP growth in the business sector and lowered business employment growth by 1.3 percentage points. Had the total number of regulatory requirements remained steady at 2006 levels, business investment would have been an estimated 9 per cent higher while new business creation would have been 10 per cent higher.
The Liberals are promising to expedite approvals for projects such as high-speed rail, pipelines and electricity grids, while the Conservatives are promising preapproved “shovel ready” zones and a national energy corridor to speed up the construction of mines, power plants, data centres and pipelines. The Conservatives are also looking to boost investment by allowing individuals and companies to avoid paying taxes on capital gains for the next two years if the gains are reinvested in Canadian companies, and letting people put an additional $5,000 into their Tax Free-Savings Accounts if the money is invested in Canadian firms.
Personal finances
It’s been a rough time for personal finances. Even with inflation back to around 2 per cent, many families are clearly struggling with permanently higher costs. Over the 12 months through January, consumers made about 138,000 insolvency filings, similar to a peak before the pandemic. (Keep in mind, the population at the end of 2024 had grown by 3.6 million over five years.) And while borrowing rates aren’t as steep as they were a year ago, the average household is still spending roughly 14 cents out of every after-tax dollar on debt payments.
The federal parties are making a clear bid for voters’ wallets, with the Liberals, Conservatives and NDP proposing broad income-tax cuts for millions of taxpayers. Individuals could save hundreds of dollars annually from the proposed cuts, according to the parties’ calculations. The NDP would cut the GST for certain items and services, such as home heating, among a slew of proposals from the parties.
Immigration
For many years, Canada’s immigration system – built on a points system that favoured newcomers with high earnings potential – was the envy of other developed economies. But in recent years, its reputation has taken a beating as the population soared. In 2023 alone, the country expanded by nearly 1.3 million people or 3.2 per cent, the fastest growth since the Baby Boom. And this growth was largely driven by temporary residents, such as international students and foreign workers, who now total three million.
The federal Liberals have been widely criticized for overseeing a population boom during a housing crisis, and for kowtowing to corporate pressure by easing access to low-wage foreign labour. The government has taken several steps to cut back on migration to Canada, largely centred on restrictions for issuing study and work visas. It has also cut its targets for permanent resident admissions. Last year, the population grew 1.8 per cent – still higher than the historical average, but a noticeable deceleration from 2023. The Liberals’ goal for the next two years is to essentially freeze the overall population, achieved by a steep reduction in temporary residents.
Mr. Carney said he favours keeping immigration caps in place “until we’ve expanded housing.” Prior to the campaign, Mr. Poilievre said he would tie immigration levels to home construction, but hasn’t offered specifics of those numbers.
Energy
The past decade hasn’t been good for pipeline builders. The Energy East pipeline, which would have brought oil from Alberta to Quebec, was cancelled by TC Energy amid complaints by the company about regulatory hurdles. The Northern Gateway and Keystone XL pipelines were respectively killed off by the Canadian and U.S. governments. Only the Trans Mountain pipeline expansion was pushed through, after Ottawa acquired the project from Kinder Morgan for $4.5-billion and spent another $30-billion finishing it.
Mr. Trump’s tariff threats have reignited interest in pipeline construction, with the goal of diversifying markets for Canadian energy. As it stands, the industry is almost wholly reliant on the U.S. market, with some 97 per cent of crude oil exports and 100 per cent of natural gas exports heading to refineries in the U.S. The twinning of the TMX pipeline and the construction of a massive LNG facility in Kitimat, B.C., will get more Canadian energy to tidewater. But more energy infrastructure is needed if Canada is going to break its overwhelming dependence on U.S. markets.
Pipeline politics appear to be shifting. Alberta Premier Danielle Smith noted a “sea change” in attitudes toward pipeline construction amongst her fellow premiers. Even Quebec Premier François Legault suggested his pipeline-phobic province might be amenable to new construction. Both the Liberals and the Conservatives have grasped the mood and are promising to expedite pipeline approvals. Whether companies can be coaxed into building them remains to be seen.
Mr. Poilievre had hoped to fight the election on the issue of the consumer carbon tax, however Mr. Carney scrapped it on his first day in office. The Liberals and Conservatives are still divided on energy issues, with the Liberals saying they will proceed with proposed emissions caps for oil and gas producers and the Conservatives saying they will get rid of it.