December webcast

Our monthly economic webcast for December is now available: The post-election path ahead.

Economic developments

Economic data is broadly holding together, even if U.S. economic surprises have become incrementally less positive and global surprises have shifted from slightly positive to barely negative (see next chart).

Economic surprises rebounded, but are starting to revert

As of 11/29/2024. Sources: Citigroup, Bloomberg, RBC GAM

Strong U.S. economy

You wouldn’t have guessed those U.S. surprises were any less positive based on the recent run of indicators that we tend to focus on, as these have remained quite favourable. Weekly jobless claims have not merely unwound their temporary hurricane spike but appear to be continuing the downward trend that began in August (see next chart). This presents a strong argument that the labour market is achieving the soft landing that has proven so elusive in past cycles.

U.S. jobless claims declining post-hurricanes

As of the week ending 11/23/2024. Sources: U.S. Department of Labor, Macrobond, RBC GAM

Sticking with the labour market for a moment longer, U.S. payrolls for November will be released this coming Friday, and they should look fairly good. Recall that the October number was unnaturally soft (up just 12,000 positions), due – we believe – to hurricane distortions. The November data should therefore manage the month’s normal hiring plus perhaps another 100,000 catch-up jobs. It isn’t much of a leap to imagine this could land above the consensus of +215,000 positions.

Elsewhere in the U.S. economy, it has been well documented that bank lending standards toward businesses have been easing for several quarters. It therefore isn’t a surprise, but is nevertheless welcome, that bank lending to businesses is starting to rise again (see next chart).

U.S. credit has started to rise

As of the week ending 11/13/2024. Sources: Federal Reserve, Macrobond, RBC GAM

The ISM (Institute for Supply Management) Manufacturing print for December has just been released and staged a nice rebound of its own, from 46.5 to 48.4. That was slightly ahead of consensus and brought with it some attractive sub-components. For example, the New Orders Index rose from 47.1 to 50.4 and the Employment Index increased from 44.4 to 48.1. While the raw numbers themselves aren’t great (50 is the delineation point between expansion and contraction), this is the best headline reading in five months. The manufacturing sector has been in an unceasingly sour mood for two years.

In turn, U.S. fourth-quarter GDP (gross domestic product) is now tracking a solid +2.7% annualized. That’s roughly in line with the prior two quarters and evidence of a healthy economy.

The debate has become whether the Fed pauses or eases by a moderate 25 basis points. The market slightly favours the rate cut, as do we.

With Thanksgiving just behind us, it is possible to check in on the appetites of the American consumer. The initial results are mixed. Black Friday spending appears to have surged by 7-15% year-over-year (YoY) for online purchases. But it appears to have been roughly flat for in-store buying. Combined, Mastercard figures Black Friday sales rose by a moderate 3.4% YoY across all channels.

We don’t tend to put too much weight into Thanksgiving spending data, as the interpretation is quite blurry. After all, if spending is surging during Thanksgiving, does that reflect simple consumer enthusiasm or instead a financially stressed consumer trying to stretch their dollar by taking advantage of discounts (and merely pulling future spending forward)?

The next Fed decision approaches on December 18. The debate has become whether the Fed pauses or eases by a moderate 25 basis points. The market slightly favours the rate cut, as do we. Yes, inflation is a bit hotter and the economy is proving resilient. But the fed funds rate is still quite high relative to what we believe to be a neutral setting, and the Fed has only just begun its easing cycle. We presume the Fed starts to seriously weigh a pattern of intermittent pauses and rate cuts once 2025 has begun, and target a terminal fed funds rate of around 3.5% by the end of 2025.

Chinese mini-revival

China still faces a variety of economic challenges, but it has enjoyed a few small victories lately. One is that the Caixin Manufacturing Purchasing Managers’ Index (PMI) rose from 50.3 to 51.5, one of its better readings over the past year. Sceptics can argue that this revival may be in part due to U.S. importers stockpiling Chinese products before anticipated tariffs.

China’s housing market remains a source of worry, with a cobweb of interconnected vulnerabilities spanning households, builders, local governments and banks. But the housing market has actually been looking somewhat up lately.

The risk of Chinese builders blowing up has seemingly declined over the past year, at least as evidenced by the credit spread on Chinese property-related high yield bonds. This has fallen from more than 5000 basis points(!) a year ago to around 1200 basis points today. Of course, that still leaves a chunky spread, reflecting considerable remaining risk.

We still expect more Chinese stimulus in the months ahead, perhaps delivered with force after U.S. tariff intentions become clearer.

Chinese new home sales are modestly ahead of a year ago and rising, though Chinese new home sales do traditionally rise into the New Year. The existing home sales data is more clearly promising, up 30% YoY and stronger not just than a year ago but than in pre-pandemic 2019. It still stretches the imagination to think that Chinese housing will surge from here, especially with home prices continuing to fall, but government actions to reduce borrowing costs, increase the availability of mortgages and absorb excess housing inventory may be having some effect.

We still expect more Chinese stimulus in the months ahead, perhaps delivered with force after U.S. tariff intentions become clearer.

Economic upside index

We constructed an economic upside index a decade ago, and after years of hibernation it is back in the spotlight (see next chart). The idea behind the index is that, entirely separate from a country’s short-term economic outlook (as determined by such variables as population growth, productivity increases, fiscal stimulus and monetary stimulus) lay a series of variables that can inform whether a country is living beyond its means or not.

• If not, an economy can be said to have greater “upside” over the admittedly amorphous medium run.

• If yes, there is the prospect of the economy growing less quickly at some point in the future.

Economic Upside Index shows positive story in Ireland, parts of Europe

As of 2024. The Economic Update Index estimates the potential cumulative boost to demand over the next five years, beyond the normal trend growth rate for each country. The boost is assumed to come as current account imbalances reverse, fiscal deficits shrink, and output gaps close, factoring in the effects of demographics and currency movements on capacity. Sources: Haver Analytics, RBC GAM

The first variable in the index is a country’s current account balance (see next chart). The idea behind its inclusion is that a country running a large current account deficit like Greece is borrowing from the rest of the world and thus living beyond its means. Conversely, a country like Ireland with a current account surplus is saving more than it needs to, and so can sustainably ramp up its demand in the future.

Current account reveals supply-demand mismatches

As of Q2 2024. Sources: Organisation for Economic Co-operation and Development, Haver Analytics, RBC GAM

The second variable is a country’s fiscal balance (see next chart). The logic is the same as with the first variable: a surplus means a country could do more fiscal stimulus; a deficit means a country should eventually deliver fiscal restraint. The U.S., Mexico, Japan and France are all particularly challenged in this regard. To avoid double-counting (since the fiscal balance already lies within the broader current account balance), we reduce the weight of both variables relative to the other inputs.

Most countries need to shrink their fiscal deficits

International Monetary Fund (IMF) projections for 2024 structural balance. Sources: IMF, Haver Analytics, RBC GAM

The third variable is a country’s output gap. By definition, a country with a positive output gap is living beyond its means. A country with a negative output gap is living below its potential. Italy and the U.S. are running hotter than other countries, while Sweden, Greece and France are running cooler. In both cases, one should expect an eventual convergence toward a flat output gap (see next chart and note the inverted axis).

Slack in economy = room for growth

As of 12/3/24. OECD projections for 2024 output gaps. Sources: OECD, Haver Analytics, RBC GAM.

The fourth variable is a country’s trade-weighted exchange rate versus its fair value (see next chart). The idea is that a country with an expensive currency is experiencing a competitiveness disadvantage that should fade over time as its currency normalizes. A bit of fancy math is required to convert the foreign exchange gap into economic growth terms. The U.S. actually has the most overvalued exchange rate, meaning that – unlike with most of the other inputs – it has room for its economy to grow more quickly if its exchange rate were to normalize. Conversely, Japan’s exchange rate is particularly undervalued.

Overvalued currencies to boost growth as they mean revert

As of October 2024. Percentage overvaluation (undervaluation) of latest real effective exchange rate versus historical average since 1996. Economic upside estimated by multiplying overvaluation (undervaluation) by 1/3 to capture the fraction that affects potential output, and then by 0.07 to reflect elasticity of currency movements on GDP. Sources: OECD, Haver Analytics, RBC GAM

We also include a fifth variable – the extent to which a country’s population growth is set to slow or speed up over the coming five years. But in practice this slow-moving variable doesn’t usually play a large role, so we won’t focus on it here.

The way the different inputs interact to inform the overall index is shown here (see next chart).

Contributions to Economic Upside Index for different countries

As of 2024. The Economic Upside Index estimates the potential cumulative boost to demand over the next five years, beyond the normal trend growth rate for each country. The boost is assumed to come as current account imbalances reverse, fiscal deficits shrink, and output gaps close, factoring in the effects of demographics and currency movements on capacity. Sources: Haver Analytics, RBC GAM

The overall takeaway is that the U.S., UK, Italy, Mexico and Canada may have to grow somewhat less quickly than their natural steady-state growth rate at some point in the coming years. On the other hand, Ireland, Sweden, the Netherlands and Switzerland are all in theoretical position to grow notably more quickly than their norm. The numbers shown on the graphs represent the theoretical cumulative addition or subtraction of economic demand, so the figures are quite large in some cases, even if any adjustment would likely be spread over many years.

To reiterate, this is obviously a theoretical exercise. It isn’t realistic to think that every variable in every economy will magically reach equilibrium in a few years’ time. There may be some gradual magnetic pull in that direction, but probably nothing more. No one realistically expects Ireland’s current account surplus to completely vanish or the long-standing American current account deficit to suddenly go away. But there is the potential for somewhat more Irish demand and somewhat less American demand than otherwise. This is probably worth flagging for investors with long-term orientations.

U.S. election update

The U.S. election is now four weeks in the rear-view mirror and Trump’s inauguration remains seven weeks in the future. Yet additional insight is constantly being gleaned about the policy direction ahead. Let’s review the latest developments.

Economic optimism

For starters, forecasters and markets remain positive about the economic implications of the Trump victory and Republican sweep of Congress. In line with this, economic news sentiment is now the highest it has been dating back at least seven years (see next chart).

Daily news sentiment in the U.S. is running high

As of 11/24/2024. Sources: Federal Reserve Bank of San Francisco, S&P Global, Macrobond, RBC GAM

Economic sentiment on X (formerly Twitter) has also surged to the highest level since the start of the pandemic (see next chart). Recall also that the ISM Manufacturing Index rose post-election, likely also on improving sentiment.

Twitter Economic Sentiment suggests more optimistic sentiment in the U.S.

Twitter Economic Sentiment Index as of 11/17/2024, University of Michigan Consumer Sentiment as of Nov 2024. Sources: Goldman Sachs Global Investment Research, University of Michigan, Macrobond, RBC GAM

Cabinet nominees

President-elect Trump has named a raft of unconventional cabinet nominees, reflecting his penchant for disruption and his unorthodox policy views.

But his Treasury Secretary nomination – Scott Bessent – pleased markets given the candidate’s relatively centrist economic and fiscal views. The naming of Bessent, a prominent macro hedge fund manager, sent the stock market up, bond yields down and the dollar down – arguably the perfect outcome.

Financial markets also expressed relief that Bessent talked about tariffs as a negotiating strategy rather than a means to an end themselves. This suggests he will argue against putting large tariffs in place.

Bessent has spoken of a 3-3-3 plan that would seek to reduce the U.S. budget deficit to 3% of GDP, increase GDP growth to 3% YoY and ramp up American oil production by a further 3 million barrels of oil per day. In truth, it isn’t clear that all of these things are genuinely achievable. The deficit is presently 8% of GDP, which is a long way from 3%. The U.S. sustainable GDP growth rate is arguably somewhere in the 2s rather than 3%-plus, and there is not an infinite supply of attractive oil reserves in the U.S. to be tapped.

But these critiques arguably miss the point. The main point is that Bessent cares about the deficit, which was virtually ignored during the election campaign. That’s hugely important, as the U.S. cannot run such enormous deficits forever. It was also promising that his talk of 3% growth referenced deregulation as the central driver, as this would be one of the only plausible ways to juice growth without worsening the deficit and overheating inflation.

Financial markets also expressed relief that Bessent talked about tariffs as a negotiating strategy rather than a means to an end themselves. This suggests he will argue against putting large tariffs in place. And to the extent that additional tariffs are indeed implemented, he emphasized the importance of incorporating them gradually to avoid a large economic or inflationary shock.

Bessent, if successfully appointed, will serve at the pleasure of President Trump and will therefore voice the President’s views. But Bessent has the potential to act as a moderating influence.

Tax timing

U.S. tax cuts were originally expected to be delivered in late 2025 given that this is when the prior set of Trump tax cuts expire. That’s still not a bad guess with regard to timing and would imply a significant economic boost for 2026 rather than 2025.

But there is now talk of a single omnibus bill that would deliver virtually the entire sweep of Trump policy aspirations in one giant package. It would include tax cuts, border policy, trade policy and energy policies all at once. So the tax cuts could arrive sooner.

But do not forget several tempering considerations:

• Much of the “tax cut” effort is really preventing prior tax cuts from unwinding higher. You can pass the legislation in February or December but the economic effect is still that a large drag is avoided when taxes fail to reset higher at the start of 2026.

• Even with a disciplined Republican Party and a dominating leader, it is not automatic that Congress can pass all of the legislation at once given a thin majority in the Senate and a razor-thin majority in the House of Representatives. It may have to be done in piece-by-piece fashion for this reason. A particular tax-related concern is that politicians from predominantly northeastern states are keen to restore state and local tax deductions that were sacrificed in Trump’s first term to help pay for the other tax cuts. This, among other factors, may gum up negotiations.

• From a political perspective, it may be more valuable to be able to claim many smaller victories spread out over the year than a single large victory.

Despite the uncertain implementation date, we do expect tax cuts. We even highlight the possibility that the cuts involve significantly more than just avoiding the expiry of earlier cuts. The existing corporate tax rate is 21%, and the prior rate – which policy reverts to if nothing is done – is 35%. There has been talk of incrementally reducing the rate to 20%, but we think a significant fraction of businesses could even see their tax rate reduced to 15%. Trump has talked about this as a special rate for companies that make products in the U.S., but it may be defined liberally.

Tariff threats

Somehow there is less clarity about the outlook for tariffs than there was coming out of the election, with new ideas coming fast and loose. As always, it is best to view tariff threats as the opening offer in negotiations with countries, as opposed to the final word on approaching trade barriers.

On November 30, Trump threatened a 100% tariff on countries that seek to replace the U.S. dollar as the world’s reserve currency. Presuming he isn’t referring to bitcoin (which he favours) or the euro (which shed most of its reserve currency appeal over the past 13 years).This is surely an oblique reference to the Chinese renminbi, which has seen some increased use over the years even though the country lacks many of the qualities necessary to be a true reserve currency (a floating exchange rate, open capital flows, sufficient liquidity, risk-free securities in which to store assets, the just and consistent rule of law). Consistent with our interpretation, the dollar rose and the renminbi depreciated.

Somehow there is less clarity about the outlook for tariffs than there was coming out of the election, with new ideas coming fast and loose.

This is where it gets confusing. Trump had threatened a 10% tariff on China just last week but spent most of the election campaign proposing a 60% tariff on China. It is impossible to reconcile these different numbers other than by concluding that the U.S. will be putting pressure on China, with the final number up in the air and subject to the degree to which China concedes to U.S. demands.

On November 25, Trump warned of 25% tariffs against Mexico and Canada. This differs from the 10% blanket tariff that Mexico and Canada were implicitly threatened with (along with every other non-China nation) during the presidential campaign. The Canadian dollar and Mexican peso both fell in response.

Some rudimentary economic modelling finds that if both countries were subjected to full 25% tariffs by the U.S. – and reciprocated – their economies would be around 6 percentage points smaller than otherwise within a few years, pointing to the potential for a substantial recession in both countries.

But we are dubious that both countries will truly be hit by 25% blanket tariffs. This is for several reasons. Most importantly, Trump uses the threat of tariffs to extract other concessions. It is clear what his main desired concession is from Mexico and Canada: tighter border controls.

Trump complains of illegal drugs and undocumented residents entering the U.S. from the two countries. Both nations are likely in a position to tighten their border controls, and this compliance should reduce the tariff damage.

It is hardly a stretch to suggest that Mexico is more the focus than Canada on this front given that the bulk of illegal immigrants and illicit drugs are believed to cross the southern U.S. border rather than the northern one. Canadian politicians are visibly trying to separate themselves from Mexico for this reason (and indeed there are other important differences between Mexico and Canada that include a much smaller Canadian trade surplus with the U.S. and much higher wage costs that do not challenge U.S. competitiveness).

Trump uses the threat of tariffs to extract other concessions. It is clear what his main desired concession is from Mexico and Canada: tighter border controls.

Mexico and Canada were similarly threatened by tariffs in 2017-2020 and even had steel and aluminum tariffs temporarily applied against them. But they were ultimately able to negotiate their way out of these and other threatened tariffs via the creation of the USMCA trade agreement. It is likely to be a similar process this time, with lengthy negotiations and likely some additional trade impediments thrown up, but nothing approaching 25% on all exported goods into the U.S.

Note also that by virtue of their existing membership in the USMCA trade deal (which Trump helped to create, notably), the scope for tariffs should theoretically be limited. That said, the U.S. does have wiggle room for implementing tariffs for national security, anti-dumping or countervailing reasons. The national security motivations have been interpreted expansively in the past. Further, even illegally applied tariffs can take months to years to wend their way through various appeals processes, such that the Trump tariff threat is not toothless.

The USMCA trade deal is set to be revisited in 2026. If current sentiments prevail, it would not be a surprise to see significant modifications that limit the capacity for Chinese companies to bypass U.S. tariffs by transiting goods through Mexico, or even for the USMCA to be replaced by separate bilateral U.S. trade deals with Canada and Mexico that separately address the very different economic realities of the two countries.

Trump risks

Our base-case forecast for the Trump administration is modestly more short-term economic growth and inflation, with both effects fading somewhat over time.

But there remains considerable policy uncertainty around precisely what the Trump administration will do. Let us consider three alternative policy directions with less favourable economic implications.

1. The first scenario involves the stronger version of Trump’s policies being implemented. Rather than moderate tariffs, the full threatened tariffs are applied. The deportation of undocumented residents is comprehensive rather than partial. Government spending declines sharply. The result is materially less economic growth due to bigger trade barriers, fewer workers and less government spending, and significantly higher inflation due to those same tariffs and the loss of inexpensive undocumented workers. The rest of the world would also be adversely affected by higher tariffs and less U.S. growth leadership.

2. A second scenario revolves around potential changes to American foreign policy. The war in Ukraine could intensify and advantage Russia if a ceasefire is not achieved and the U.S. reduces its support for Ukraine. There is also the risk that the conflict in the Middle East intensifies given Trump’s views on Iran. From an economic standpoint, these events might elevate the price of oil, natural gas and agricultural products.

3. A third category of U.S. political risk is that our base-case assumption of moderate policies is indeed delivered, but the economy accelerates more than expected in response. This would prevent inflation from settling and stop the Fed from cutting rates much (or at all) further. In an extreme form of the scenario, rate hikes might even be necessary.

None of these are especially likely outcomes, but they are tail risks to consider and represent less attractive outcomes from an economic and financial market standpoint.

Promising U.S. housing

We posit that the U.S. housing market can probably strengthen modestly from here, despite some continuing challenges.

Home prices are already rising and can likely continue to increase at a moderate clip. Demand is fundamentally supported by low unemployment, robust wage growth and a rising population. After a period of high interest rates, pent-up demand is building. Some of this should be unlocked as time passes and as mortgage rates decline tentatively further. There is also presently a low level of homes for sale, supporting prices.

The big counterpoint to all of this is that housing affordability is still poor (see next chart). But affordability is no longer deteriorating, and we expect rising incomes and lower rates to begin chipping away at this problem over time.

U.S. housing affordability remains poor

As of Q3 2024. Current carrying cost of a home versus the historical norm. Sources: Haver Analytics, RBC GAM

From a housing supply standpoint, it seems reasonable to expect some increase in construction.

• There is a multi-million-unit housing shortage.

• Residential investment has room to increase as a share of GDP (see next chart).

• Homebuilders are becoming less skittish.

• The attractiveness of financing new projects should improve as rates fall and home prices rise.

• Demand for homes should rise as discussed in the prior paragraph.

U.S. residential investment has stumbled

As of Q3 2024. Historical average since 1947. Shaded area represents recession. Sources: U.S. Bureau of Economic Analysis (BEA), Macrobond, RBC GAM

Canadian corner

Economic conditions

Canadian third-quarter GDP was distinctly unimpressive, up just 1.0% annualized (see next chart). This was below the Bank of Canada’s 1.5% forecast. Softening the blow, and purely by virtue of a particularly weak Q3 2023 that drops out of the year-over-year equation, the annual change in Canadian GDP growth actually accelerated from +0.8% to +1.5% YoY (see subsequent chart).

Canadian economy lost steam in the third quarter of 2024

As of Q3 2024. Sources: Statistics Canada, Macrobond, RBC GAM

Canadian growth differential: GDP versus GDP per capita

As of Q3 2024. Sources: Statistics Canada, Macrobond, RBC GAM

Looking ahead, we believe economic conditions are improving somewhat. The main point is that interest rates are falling, and Canadian businesses now express a bit more hope. The CFIB Business Barometer has just increased to its highest level since mid-2022. The Business Outlook Survey’s main indicator has become a bit less glum (see next chart).

Canadian Business Outlook Survey Indicator has become less negative

As of Q3 2024. Sources: Bank of Canada Business Outlook Survey, Macrobond, RBC GAM

The Bank of Canada has a rate decision of its own to make on December 11, with the debate between a 25-basis-point versus a 50-basis-point rate cut. We slightly favour the 25-basis-point option as Canada’s overnight rate has already descended quite far and there are some concerns about the currency.

Canadian immigration surge?

Should Canadian forecasters budget for a massive surge in undocumented residents as the Trump administration seeks to push the country’s 11-15 million undocumented residents out of the country? It is a definite risk.

Canada has occasionally been the recipient of large numbers of people fleeing the U.S. In the 18^th century, around 50,000 loyalists came to Canada. In the 19^th century, about 30,000 slaves fled the U.S. for Canada via the underground railroad. During the Vietnam War, as many as 100,000 draft dodgers moved to Canada over the span of several years.

Most recently, between 2017-2020, over 100,000 asylum seekers left the U.S. for Canada via a regulatory loophole that allowed asylum claimants to seek refugee status if they transited the border at unofficial crossings such as Roxham Road, south of Montreal, Quebec.

But there are several reasons why any such flow should be relatively constrained. We do not expect the U.S. to be in a position to push the majority of its undocumented residents out of the country, for a mix of logistical, economic and legal reasons. We further expect that so-called sanctuary cities in the U.S. will be more attractive destinations than Canada. It should also be noted that the pressure of illegal immigration on the U.S. is already starting to fade as southwestern border encounters have fallen by a factor of three over the past year (see next chart). So deporting immigrants may become somewhat less of a priority.

U.S. undocumented border crossings have dropped

As of October 2024. Land border encounters per month. Sources: U.S. Department of Homeland Security, Macrobond, RBC GAM

Canada is also now in a position to push back against large numbers of incoming asylum claimants. Public and political attitudes have hardened after the country’s recent immigration explosion, and the government is undertaking a marketing campaign to make clear that Canada has strict rules around who is eligible to immigrate.

The Safe Third Country Agreement took effect between the U.S. and Canada in 2004, dictating that  refugees must apply for refugee status in the first “safe” country they enter. Thus, undocumented residents who have already been in the U.S. are not eligible to apply for asylum in Canada. There was long the aforementioned loophole that permitted those traversing informal crossings to remain eligible, but this was closed in 2023.

That said, there seemingly remains another loophole, which is that those who sneak across the border and are not apprehended for 14 days may still be able to apply for asylum. It is hard to fathom great numbers of people pulling this off, but the rule could still be exploited by a significant number of people.

The bottom line is that Canada is highly unlikely to receive millions of additional people, though there is the potential of an increased inflow. If this came to pass, the timing would be interesting as the additional people would partially offset the sharp decline in population growth presently anticipated for 2025 and 2026 from to the tightening of immigration rules.

Canadian election preview 2025

There will be a Canadian election in 2025 and it is worthwhile starting to think about what policy changes might result.

Polls show 43% support for the Conservative Party, which is nearly double the 22% support for the incumbent Liberals and well beyond the 18% support for the NDP. Should this hold, 338canada.com predicts that the Conservatives would win a large majority of 229 seats (172 needed for a majority), versus just 51 for the Liberals, 41 for the Bloc Quebecois, 19 for the NDP and 2 for the Green Party.

The most likely scenario by a considerable margin is a Conservative Party majority government, whether the election happens in the spring or the fall of 2025.

The outcome isn’t quite a done deal given that there are still several months before the election. It is unlikely but not quite impossible that the U.S. threat of tariffs rallies the Canadian public around its Liberal government, that recent efforts to correct the government’s immigration policy mistakes are well received, and/or that buying votes (a recently announced two-month tax holiday; recently announced lump-sum cheques for Canadians) give the Liberals with a boost.

Still, the most likely scenario by a considerable margin is a Conservative Party majority government, whether the election happens in the spring or the fall of 2025. The Conservatives are a right-leaning party, albeit one that has taken on additional populist views in recent years.

What economic policies might emerge from a Conservative government? They have voiced support for a range of policies, discussed next.

On immigration, the party proposes to link the level of immigration to the number of homes being built, the availability of jobs and the number of doctors. In principle it is possible to ramp all of these things up. But in practice this would seem to be a pledge toward lower immigration, at least in the short run as existing housing and doctor shortages are addressed. Whether that would amount to even less immigration than the recently downgraded target set out by the Liberal government is unclear, but probable. From an economic standpoint, that argues for a bit less top-line economic growth, though potentially faster GDP per capita and possibly a higher quality of life for Canadians.

On Canada’s federal budget, the Conservatives pledge to balance the budget and cap the size of the government.

Given the incredible growth in the size of Canada’s federal budget over the past decade, some effort to slow its future growth is probably also a useful thing.

Balanced budgets are certainly good, though note that the Liberals had similar plans to balance the budget within a few years of taking office but failed to deliver on them: balancing a budget usually involves unpleasant tax hikes or spending cuts, which politicians don’t like. The Conservatives also propose significant tax cuts, discussed below, which would then need to be funded somehow.

Given the incredible growth in the size of Canada’s federal budget over the past decade, some effort to slow its future growth is probably also a useful thing. This could take the government part of the distance toward balancing the budget, but likely not the whole way.

With regard to economic policy, the promises are mostly classic growth-enhancing ideas: lower the corporate tax rate and individual taxes (by lowering the tax rate on the lowest tax bracket and permitting income splitting); enable more resource development and large infrastructure projects by repealing Bill C-69; reduce red tape; reduce corporate welfare (the party embraces small businesses but has a degree of skepticism toward large businesses); and eliminate Canada’s carbon tax.

Reducing interprovincial trade barriers is also a priority, but successive governments have identified this as a priority and failed to deliver much. Provincial governments fiercely defend their powers.

On trade policy, most will ultimately be determined by President Trump’s attitude toward Canada. It may be a slight advantage that a Conservative government is more ideologically aligned with Trump, though Canada’s Liberal government deftly managed the file in 2017-2020, such that any perceived advantage may be overblown.

Caveats to all of this include that politicians don’t usually deliver every item from their platform, and fiscal constraints mean that a Conservative government would probably have to compromise somewhere.

Finally, on housing, the Conservatives propose to require 15% more home building each year as a condition for receiving federal infrastructure money – potentially a useful if blunt way to unstick building restrictions. Though it is hard to fathom that housing completions can actually increase that quickly each and every year. The Conservatives also propose to eliminate the federal sales tax on new homes sold for under C$1 million, and to provide (yet another) program to support first-time home buyers. (Of course, any effort to make home buying more attractive tends to push up home prices.)

Caveats to all of this include that politicians don’t usually deliver every item from their platform, and fiscal constraints mean that a Conservative government would probably have to compromise somewhere, jettisoning the balanced budget promise, scaling back on its tax cut plans or introducing a tax hike somewhere. Still, on the net, there is a good chance that this policy mix can be positive for economic growth, businesses and productivity.

-With contributions from Vivien Lee and Aaron Ma