Why Carney's state-directed capitalism won't end Canada's technical recession

Added: 2026-05-31

[00:00:00]It's the dreaded Rword recession just announced today, Friday. We seem to be in a technical economic constru contraction. Two back-to-back quarters. What does it all mean? What does it say about where our economy is headed to help break it down on today's round table? I'm joined by Sean Spear, my co-founder and editor at large. Well, Sean, it's happened. I think you and I expected that this was uh probably more likely than not to be part of the fallout, the aftermath of these tariffs that have been grinding away, especially on the economies here in central Canada. Uh what was your take and maybe just explain to listeners and viewers what a technical recession is because that's the call this morning, Friday.

[00:00:52]>> That's right. Uh today's discount released uh GDP uh uh growth numbers for the first quarter of the 2026 year. Uh there were different estimates Roger from bank economists and others. I think on balance people thought that it would be on the on the kind of line if I could put it that way between growth and and contraction. Um and today CRA or pardon me stats Canada has announced that it is indeed a quarterly contraction that follows a contraction in the last quarter of 2025 and it is those two consecutive quarters uh of of contraction rather than growth. That is what uh has given it the the definition of technical recession. There's a lot to say in in response and no doubt we'll get into it. But I will say the prime minister and the people around him will try to minimize this as a a a definitional issue and and less about a a kind of structural economic one. But it's not just that the economy has shrunk in two quarters, Roger. We've actually shrunk in three of the of the past four. So over over the past year, uh our economy has um teetered on the edge of of of slow or negative growth.

[00:02:01]And in that sense, I think this is more than merely uh stat statisticians and economists dancing on the head of the pin. It does speak to a of a kind of secular sluggishness in Canada's economy.

[00:02:15]>> Yeah. Let's get this chart up on the screen showing uh GDP changes, quarterly changes going back really to the the aftermath of the the pandemic. And there you can see it as Sean just said um three of the last four quarters negative.

[00:02:33]There's a lot going on here Sean.

[00:02:35]There's as we know that the the tariff the consequences of the tariff um done some great work on that showing how certain industries have been affected and how Canadian exports into the United States are down significantly. We'll we'll show those numbers in a second.

[00:02:50]But there's also a consumer in Canada that is uh you know experiencing what economists have characterized as this like K-shaped recovery where you have asset holding primarily older Canadians who've benefited from uh you know surging uh equity values uh but they are a minority and then you have a lot of the rest of the economy who's either not participating in the asset inflation that we've seen uh in stock markets and instead they're continuing to experience uh slower wage growth than the rate of inflation uh certainly over the last 5 years and they're according to Stats Canada this week they're running into this thing called a no higher no fire economy.

[00:03:40]Maybe you can talk a bit about that. uh are these the early signs of AI kicking in where employers aren't letting people go necessarily but we have that youth unemployment rate 25 to 18 almost at 15% nationally Sean with you know higher regional pockets so what do you make of this economy is is Kshape a kind of dispersion analysis the right way to think about where Canada lands uh today heading into the third quarter of 2026 Yeah, I think that's a big part of the story, Richard. Uh we've got some forthcoming analysis from you this weekend uh that that unpacks uh that line of thinking more and I'd encourage people to check it out. Uh there's the no higher no fire dynamic which I think is a combination of of AI and then the the kind of broader uncertainty hanging over the economy. But Roger, can you put the chart up uh back up for a minute, please?

[00:04:37]>> Absolutely. Here it is. because I do think one point worth dwelling on for our for our audience members is well of course we've seen this contraction in in three of the past four quarters uh and we ought to take that seriously. You know, my my take, Roger, would be that some of those green bars in the uh quarters before themselves were mostly a reflection of artificially high government spending during the the Trudeau era of deficits and artificially high population growth because of of unsustainable immigration policy. Both of those have uh adjusted a bit under the Carney government and and so I think one could argue actually um that were it not for that artificial stimulus uh we might have more red bars going back further which reinforces in a way that this is um more than an aberration more than a contingent contraction. it speaks to something more fundamental uh more structural and and and and if you believe this line of analysis, it's really just exposing itself now as those two forms of art artificial stimulus come off their their highs under the from the Trudeau government.

[00:05:49]>> Yeah, well said. Um Sean, when we think about these numbers going forward, there's a few big things that have happened uh that I presume will influence uh Q3 of 2026. One is this tale of two cities, which is a surge in oil prices that's going to bring revenue into government coffers federally and obviously in Alberta um primarily.

[00:06:15]But it's also I mean just go fill up your car uh two bucks a liter here in southern Ontario. It it also functions as a as a consumption tax uh in effect diverting uh you know consumption dollars into into energy uh purchases and away from you know the rest of the economy. And then I guess in the back of my mind what I'm concerned about is that what we've talked about for a number of weeks now is that potential for an inflationary pulse from this war. Regardless of whether the Straits of Hermos reopens or not, there's still been a lot of damage done at that. That energy is going to take a while to come back online. Prices remain high. How do you figure that out in terms of the next half of this year?

[00:07:02]Do higher energy prices net allow Canadian GDP to recover or are they a net drag on GDP going forward given the importance of the consumer?

[00:07:14]>> Yeah, it's a great question. my gut for what it's worth and welcome uh feedback from the hub community is it risks being the the latter that well higher oil prices will improve public balance sheets of course uh in Ontario or pardon me in Alberta and possibly federally that as government spending has come down as immigration levels have have have stabilized it's actually and business investment has remains uh uh painstakingly low and weak It is consumer spending Roger that is uh propping up this economy. And so uh as uh consumers particularly in central Canada face uh another demand on their scarce resources on their fixed budgets, I I worry that the forces that are improving the balance sheets of Alberta and possibly the federal government are actually putting downward pressure on consumer spending and in turn uh and in turn our our economic output more generally.

[00:08:15]>> I just want to give me a sec here. I just wanted to look at these numbers that uh we have coming out of um US impacts of of trade here. So let's go to this first thing. This is US uh import growth by source country 2025 versus 2024. Obviously, China the big loser there, the high tariffs.

[00:08:39]But boy, look at Canada as a source of of US import growth, real US imports growth down 9.3%.

[00:08:50]And then Sean, just to go on and show you the next chart, real US imports from Canada by sector, uh, 2025 versus 2024.

[00:09:02]steel obviously you know tariffs biting aluminum tariffs biting cars tariffs biting interestingly energy down and all others uh maybe those dimminimous uh the end of the dimminimous >> imports for smaller items into the United States from Canada duty-free is having an impact but Sean when you put this all together is this weakness that we're seeing like how much of it would you allocate to to the trade frictions with the United States. Is this is is that a majority explanation for this? A minority explanation? How even just just calibrate it for us? How much are trade headwinds >> the result here of these disappointing GDP numbers?

[00:09:47]>> My own take I'd welcome your thoughts is that it's playing a huge role and it's not just Roger because of the numbers that you show on the screen. Um those are the direct effects of course of of the trade tensions with the United States. The decline in in in exports to the to the US market that that is affecting different sectors but but ultimately across the economy. Those are the the direct results of those of those dynamics. Um but then there are the indirect ones that uh that I think we can attribute to them as well. You know, one of the striking um parts of today's story is that non-residential business investment has now fallen for three of the last four quarters and is at its lowest in in two years. Obviously, that's a multicausal dynamic thing.

[00:10:33]There's a lot happening. Um but I think you can attribute a lot of the the the slow or or stagnant business investment on the uh ongoing uncertainty uh about the Canada US trade relationship. So when you account for its direct effects and then these indirect ones, including investment and hiring and so on, um I I I think it's hard to to to argue um that as long as we're stuck in this kind of no man's land when it comes to the future of the Canada US trade relationship, capital is basically going on strike, hiring is going on strike, and those numbers, imports are down, and those numbers are just uh permeating uh Canada's economy.

[00:11:14]>> Yeah. Yeah. I I I just wrap up with my usual exhortation that, you know, it's great, you know, and we'll talk about in the back half of the show, Mark Carney's speech in New York once again kind of thundering on about Canada as an energy superpower, but a lot of the rest of the economy, and you've discussed this on past roundts, you know, doesn't have pipelines running through it or oil under the ground. big cities, uh, Vancouver, uh, you know, Toronto, Montreal, yes, they benefit from the knock-on effects of, uh, a stronger energy and mining sector, but what they need and what we've argued at the hub now till we're blue in the face. And I just I we could talk about this. It just surprises me in the face of these types of numbers that we're not talking about broader tax, regulatory and and competition uh reform. Um which would have a much broader effect on the economy. Uh it seems Sean that we're in a very kind of traditional playbook from the Carney government which is Ottawa will you know select winners and losers uh in the economy and more so it'll specifically double down on energy and mining because of global demand. I get that. But let's face it, the the the benign uh or beneficial hand of Ottawa seems only to stretch now to these preferred extractive industries or at least they're getting the majority of the attention.

[00:12:50]And then we've got really large deficits on top of that like deficits that are going back and rivaling some of the post postcoid years. Uh you know 65 billion we we'll have interest servicing costs at 80 billion.

[00:13:05]uh you know effectively the entire projected deficit in three years will just simply service the interest costs on the debt and as I've banged on about you know large debts there's a lot of economic uh theory and practice that suggests that they are not healthy for your economy they crowd out private capital why because government debt is the the safe uh you know rate of return on uh on those on that government debt issuance and corporations, consumers, everyone else. If you're a government and you're borrowing more and more and Canadian borrowing costs have risen uh since co uh everyone else then has to come up. Their borrowing costs actually h are higher than the government obviously because they're riskier uh than the government. They don't have the full faith and credit of uh of the federal government, you know, behind their debt. So, what do you think, Sean, about this kind of barbell strategy that the Carne government's running? you know, top-down statirected kind of uh capitalism and then large-scale deficits I guess to insulate and try to pat out different parts of the economy uh you know visav the these these record you know debt financed outside of wartime outside of recession well maybe not outside of recession for much longer. It just seems somehow out of sync with the actual challenges that we're facing which is a sclerotic economy that you again I'm not saying you don't know that lacks the animal spirits that would you know lift all boats uh not just uh in the energy and mining sectors.

[00:14:45]>> Yeah, I I I agree with all that. It's worth uh spending a moment on it. I would add to your list of preferred sectors or the the the ones that the government seems disproportionately focused on um defense. Uh we've seen a massive increase in defense spending this year and it's clearly motivated in part by meeting our NATO targets, but it's also a kind of theory of the case on the part of the prime minister and people around him as a form of industrial policy or or industrial strategy. But with the exception of of of targeted programs around defense and and parts of our natural resource sector, we haven't seen a an agenda proportionate to the economic challenges facing the country uh in in a broad-based way, one that tries to uh improve conditions for investment and employment economywide. Uh and I I think you're exactly right that as we've discussed in the past render if the problem is uncertainty and I think by and large it is in the prime minister's defense then the government almost needs to overcorrect uh in terms of of policy competitiveness to try to offset the the the hang that the fiscal hang or the economic hang that in certainty creates. So for instance, if business investment is shrink, non-residential business investment is shrinking in part because of uncertainty, then it seems to me you have to do something really dramatic on the tax front uh in order to offset the the negative effects of uncertainty on on investment decisions. And yet we've seen essentially none of that. Right, Roger? The no real interest in poking around the corporate tax rate. We reversed a punitive capital gains tax, but we haven't gone further than that.

[00:16:29]As we've I think almost discussed since day one when it comes to Trump's tariffs and and all the rest. Uh it's not enough for Canada to be broadly competitive with the US. Uh we need to be much more competitive. And I think what these numbers show is that the absence of that kind of proportionate response to these underlying economic circumstances means that capital is going to remain on strike for the foreseeable future. Uh and the technical recession that we've experienced in the in the past two quarters risks um um being longer and larger um um in in the months and years moving forward.

[00:17:07]>> Yeah, just two final comments. I mean one it is remarkable to see this kind of sluggish in fact negative now GDP growth given the size of the counter cyclical deficit at 65 billion projected for this year like that suggests uh we're not in Kansas anymore and there are some some things that are really wrong with the economy because you should not be I think seeing that level of of economic sluggishness against again uh counterintuitive uh deficits of of a size that you know again would normally rival what would have been uh and it's not just this year it's deficits as you say that were loaded back for years now uh so for us to end up in this place again I just think you have to go back to the consequences of running a high debt society across governments consumers uh non-corporate financial uh all the economic research shows that that extracts a pound of flesh at the end the day in terms of sluggish and slow growth. My final comment to what you said, Sean, is I just and I'll give you the last word here. I just wonder if there's a tension here because if the carne government was serious let's say about taxation reform about reducing uh you know Canada's top marginal tax rates which are deeply uncompetitive uh with peer states and jurisdictions on the US when you compare uh you know the different provincial rates with the federal add-ons that would require Ottawa ma engaging in tax expenditures corporately or individually it would reduce Ottawa's fiscal capacity and that's not how this government wants to operate. Sean, it it thinks that it should be deploying uh you know again mostly debt finance but also whatever tax revenues can be extracted at these punitive rates into its preferred kind of theory of the case. The the rupture thesis that we're going to discuss on the back half of the show some more focusing on Mark Carney's speech in uh New York. So I I'm just not holding my breath here because I see a fundamental tension between, you know, the the proven playbook of regulatory tax and competition reform and how that generally either takes government out of the economy, makes it less influential, less powerful, and it does so either directly in terms of reduced tax revenues uh that it has to give up in order to foster that growth or uh regulatory and other control uh you know uh managed competition that it uses to express its policy preferences its political preferences through compliant industries like banking telos now increasingly energy with the pathways project it's demanding large-scale carbon sequestration as a condition for building a pipeline this is a whole theory of a case that that this government has and other governments too I'm not singling out the carne government is that this is something deeply novel that they've come up with.

[00:20:11]This is a playbook that's been run in the past and is being run by other advanced economies right now. But the fact is it not Sean that you in some ways you can't walk and chew gum at the same time. You can't preference the types of of policy framework that the Carne government has and engage again in a pretty true tried and tested playbook for reawakening reinvigorating the broader economy through tax competition and regulatory reform.

[00:20:40]>> Yeah, I think that's right. Um uh you know, you can't teach an old dog new tricks. uh this clearly uh this approach to policym is at the heart of of the carne government's agenda. Uh the sovereign wealth fund is only the latest example of this kind of top down approach. There was estimates this week, Roger, that uh that the sovereign wealth fund will cost $750 million in interest costs uh each and every year. So the $25 billion number that the the government announced um has to generate returns um that exceed almost a billion dollars a year just in in interest costs alone to say nothing of the opportunity cost of that kind of borrowing and all the rest. So I I I think you're on to something uh here. I would I would just say that as I was as I mentioned earlier, I'm struck, Reard, and this is something we've been on about for some time that um that the Trudeau government relied on deficit spending and unsustainable immigration levels to kind of obscure or conceal the weakness of Canada's economy, >> secular decline.

[00:21:49]And I you do get the sense, Roger, that as the Carne government responds to the to political pressures to address both of those issues, uh we're left uh with a clearer sense of just how weak Canada's economy is. And you're not going to solve for that structural secular weakness um by writing checks to preferred industries or preferred companies. It's going to take something um by definition structural. And as you say, there's a there there is a case that the Carne government is is kind of ideologically incapable of that kind of structural change.

[00:22:23]>> Yeah. Uh you can't have your cake and eat it too. Uh and I think this government likes a very certain type of I don't know, Black Forest um cheesecake. I don't know what it is, but it's a particular flavor they like when it comes to the economy. and and I just don't think it's necessarily compatible with the broader kind of sweeping reform agenda that I I think the economic moment suggests. Well, Sean, we're going to put a pin in this the uh complimentary first half of uh the round table. If you want to join Sean and me on the back half, we're going to discuss Mark Carney's consequential speech in New York yesterday to American investors. What's the latest pitch of this PM to uh to the Trump administration and Wall Street? We've got that for you on the subscriberonly back half of the round table. You can become a subscriber for as little as uh a dollar a week. You get all of our premium content uh including uh great shows uh like in conversation with David from and uh hub politics uh along with other exclusive subscriberonly written and digital content. Become a hub subscriber now at ww.thehub.ca.

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