Canadian Economy Underperforms US, Largest Gap On Record: RBC

The Canadian economy is getting ready to part ways with its closest ally, at least when it comes to performance. A new analysis from RBC looks at the emerging gap between the historically intertwined economies, and notes Canada is significantly underperforming its neighbours to the South. The weakness of Canada’s highly indebted households in contrast to the robust strength of American households, has led to the largest gap between the two counties on record. That means both countries may require very different monetary policy decisions in the near-term. 

Canadian Economy Has Never Underperformed The US By Such A Large Gap   

The Canadian and US economies are historically closely intertwined, and it’s easy to understand why. Both economies share the world’s largest unprotected border, sharing national security costs as well as allowing the free flow of goods. The U.S. represented two-thirds of Canada’s trade last year, and that’s been the case more-or-less for decades. Consequently, both economies have seen similar advances in GDP growth and inflation. 

That’s changing, and fast. “The underperformance of Canada’s economy versus the U.S. since 2023 is unusual given close cross-border economic ties,” explains Claire Fan, an economist at RBC.

Her analysis shows Canadian per-capita real GDP falling significantly short of the U.S. since 2019, with a gap growing 10% by Q1. The gap is now the widest on record, going back to at least 1965, the earliest data readily available. 

Unsurprisingly, that same gap is creating an inflation gap. Fan notes that annualized headline CPI from December to April was 4.3% in the U.S., but just 1.3% in Canada. The target rate of growth is 2%, so Canada may need an injection of stimulus before the U.S., which is still seeing inflation run hot—even re-accelerating. 

“Economic performance has generally been in sync between the two countries in the past because of their close relationship, along with inflation trends. But more recently, the Canadian economy has started to severely and persistently underperform,” she says. 

Canada’s Highly Indebted Households Can’t Keep Up With American Households These Days

The trillion dollar question—why are the two economies diverging so much? Fan notes that the output gap is still running fairly consistent when it comes to manufacturing. Where Canada and the U.S. have diverged is services, largely due to the gap in household strength. 

American consumers are still cranking out substantial spending growth on services, as well as the government. This accounted for 70% of GDP growth for the U.S. Since services aren’t typically imported, Canada isn’t benefiting much from a spillover effect.

Canadian Monetary Policy Will Need To Diverge From US

Canada’s highly indebted households aren’t catching that second wind when it comes to consumer spending. Instead,  supersized housing costs are consuming a greater share of income. 

This problem isn’t expected to resolve quickly either. “The Canadian economy is continuing to underperform even as interest rates are set to drop slowly from high levels,” explains Fan. 

Adding, “We expect Canadian GDP growth will stay soft this year, rising by just 1.3% as households continue to grapple with elevated borrowing costs. That along with persistent easing of global supply chain constraints should keep Canadian inflation lower, regardless of strong demand out of the U.S.”

One positive to this divergence is Canadian interest rates will have to diverge, explains the bank. In order to bolster demand to stabilize low inflation, the Bank of Canada will have to cut its interest rates more substantially than the U.S.

It may sound bullish when it comes to housing, but it’s important to remember a real downturn is very different from the one seen during the pandemic. An induced downturn where everyone gets to work from home and the state pads incomes is likely to be very different from a traditional recession, where unemployment climbs and fewer people have employment to return to. 

9 Comments

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  • Reply
    DB 1 day ago

    I wonder what happened in 2015? Hmmm. It’s a head scratcher.

  • Reply
    Frank 23 hours ago

    Look no further than the policies that are dramatically failing Canadians. Downward trajectory in all sectors. Housing is high, many complain why should the youngers pickup the tab so boomers can retire. Those picking up the tab will do so in the way of inheritances. The instant gratification in today’s society where google has made everyone an expert on all matters. One thing itissed: the boomers aren’t to blame, the governments are well aware of the massive wealth transfer impending and are setting the stage for it. Patience will ne rewarded,just a matter of time.

  • Reply
    Rickshaw 23 hours ago

    Look no further than the policies that are dramatically failing Canadians. Downward trajectory in all sectors. Housing is high, many complain why should the youngers pickup the tab so boomers can retire. Those picking up the tab will do so in the way of inheritances. The instant gratification in today’s society where google has made everyone an expert on all matters. One thing it missed: the boomers aren’t to blame, the governments are well aware of the massive wealth transfer impending and are setting the stage for it. Patience will be rewarded,just a matter of time.

  • Reply
    Nomad 22 hours ago

    Go woke end up broke. Can’t do business with gender wars and gender laws.

  • Reply
    [email protected] 16 hours ago

    BUY UP TO 20 HOUSES IN THE USA INSTEAD OF ONE TOWNHOUSE IN BRITISH COLUMBIA OR ONTARIO.
    DITCH EVERYTHING YOU OWN IN CANADA.

  • Reply
    Trudeau Fan 9 hours ago

    But Canada is special and good and America is bad!! It’s not fair!!

  • Reply
    Nutbuster 3 hours ago

    The future of Canada has never been so uncertain. The upshot of this all is I’m still able to cum. And trust me, I cum a lot!

  • Reply
    Steve C 3 hours ago

    When you look at the chart closely, we can see clearly that something happened which spooked investors and cause the economy to begin to collapse somewhere in 2015?

    I wonder what changed in Canada in 2015???

  • Reply
    CockerSpanial 3 hours ago

    Fantastic article, Daniel. Canada desperately needs a bipartisan solution for housing and immigration. The current fixation on party politics is clouding our collective judgement. We need economic policy reform above all else.

    Now, this might be a shot in the dark but…would you ever want go grab a drink sometime? I have huge balls and a pretty nice face. Give a thought! Thanks.

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