FINLAYSON: Carney government should recognize that private sector drives Canada’s economy

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At the halfway point of what’s shaping up to be a turbulent 2025, how is Canada’s economy faring?    

By any measure, the past six months have been a bumpy ride. The Canadian economy lost momentum over much of last year, with economic growth cooling, job creation slowing and the unemployment rate creeping higher. Then, as 2025 began, came the shock of U.S. President Donald Trump’s tariffs and, more recently, the outbreak of increased military conflict in the Middle East.     

Amid these developments, indices of global policy and business uncertainty have risen sharply. This creates a difficult backdrop for Canadian businesses and for the re-elected Liberal government led by Prime Minister Mark Carney.    

Economic growth in the first quarter of 2025 received a temporary boost from surging cross-border trade as companies in both Canada and the United States sought to “front-run” the risk of tariffs by increasing purchases of manufactured and semi-finished goods and building up inventories. However, trade flows are now diminishing as higher U.S. and Canadian tariffs come into effect in some sectors and are threatened in others. Meanwhile, consumer confidence has plunged, household spending has softened, housing markets across most of Canada are in a funk and companies are pausing investments until there’s greater clarity on the future of the Canada-U.S. trade relationship.    

Some forecasters believe a recession will unfold over the second and third quarters of 2025, as the Canadian economy absorbs a mix of internal and external blows, before rebounding modestly in 2026. For this year, average economic growth (after inflation) is unlikely to exceed 1%, down from 1.6% in 2024. The unemployment rate is expected to tick higher over the next 12-18 months. Housing starts are on track to drop, notwithstanding a rhetorical political commitment to boost housing supply in Ottawa and several provincial capitals. And business investment is poised to decline further or, at best, remain flat, continuing the pattern seen throughout the Justin Trudeau era. Even this underwhelming forecast is premised on the assumption that ongoing trade tensions with the U.S. don’t spiral out of control.    

How should Canadian policymakers respond to this unsettled economic picture? We do not face a hit to the economy remotely equivalent to that generated by the COVID pandemic in 2020-21, so there’s no argument for additional deficit-financed spending by governments, particularly when public debt already has been on a tear.    

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For the Carney government, the top priority must be to lessen uncertainty around Canada-U.S. trade and mitigate the threat of sweeping tariffs as quickly as possible. Until this is accomplished, the economic outlook will remain dire.      

A second priority is to improve the “hosting conditions” for business growth in Canada after almost a decade of stagnant living standards and chronically weak private-sector investment. This will require significant reforms to current taxation, regulatory and project assessment policies aimed at making Canada a more attractive location for companies, investors and entrepreneurs.    

An important lesson of the Trudeau era is that economic prosperity cannot be built on the back of an expanding government sector, higher deficits and ever-greater political tinkering with the economy. It’s time for something different. Policymakers must recognize that Canada is a largely market-based economy where the private sector, rather than government, is responsible for the bulk of production, employment, investment, innovation and exports. This insight should inform the design and delivery of economic policymaking going forward.     

Jock Finlayson is a senior fellow at the Fraser Institute