The Great Canadian Divergence
Small business optimism hits a multi-year high, but under the surface, the labour market is cracking and youth unemployment is at a 35-year high.
Canada’s business confidence picture is confused. The CFIB Small Business Barometer — which surveys smaller retailers and is skewed to the province of Ontario — has surged to 64.8, a level not seen in years, suggesting that small business owners are feeling unusually optimistic. It’s a similar positive cyclical outlook with Canada’s Manufacturing PMI. Shrugging off the tariff headwinds, Canadian manufacturers are quietly turning a corner — new orders are growing, hiring is picking up, and optimism is at its highest in over a year, though rising steel and aluminum costs are squeezing margins and keeping a lid on the recovery.
But zoom out to the broader economy and the story darkens: Services PMI has collapsed to 46.6, firmly in contraction territory, meaning the firms that employ the majority of Canadians are actually pulling back.
The BOC Not Hiking Rates
Markets have quietly started pricing in rising interest rates, spooked by oil-driven inflation fears following the conflict in Iran. Expect the Bank of Canada to look through that mess and hold fast. Despite some tentative signs of positive cyclical improvements, Canada’s economy is weak, the labour market is contracting, and inflation is on target but trending lower.
Still a Petro-Loonie
Canada is the world’s fourth largest oil producer (4mn barrels a day), and crude oil is the country’s single most important export — and the Loonie knows it. This explains the Canadian Dollar’s outperformance versus currencies from countries and regions that are energy importers (the euro area, Japan, and the U.K.).
Canada’s Labour Market Cracks
Canada shed 84,000 jobs in February. This was the worst monthly print in years. Full-time private sector jobs took the brunt of it, which matters because those are the positions that pay mortgages and drive consumer spending.
Not Made in Canada
Contrary to the positive cyclical momentum, Canada’s manufacturing sector is in structural decline. It has been in recession since May 2023 — the longest such stretch in a generation. This predates President Trump, the tariff and the trade wars by years. Excessive regulation, energy policy uncertainty, and a carbon tax that raises the cost of the very inputs that factories run on have made Canada an expensive and unpredictable place to make things.
A Generation Forsaken
The official figure for Canada’s youth unemployment rate has hit 14.1%. But this significantly understates the pain. Adjust for the collapse in participation which translates to a record 1.86 million young Canadians who have given up looking for work entirely, and the true number is 18%. A 35-year high outside of a recession or pandemic. This isn’t just a statistic. It speaks to a generation entering the workforce during a prolonged period of joblessness and disengagement. A crisis that will bear economic and social scars for years.
No question, excessive regulation, regulatory disfunction, high marginal tax rates, tax code complexity, and our habit of playing with taxe rates like some political Nintendo game all contribute to reduced certainty, reduced investment and, therefore, lower average productivity.
But another factor at play is the above mentioned Petro dollar, and I don’t think this is receives the attention it deserves. In this sense, what is good for the western provinces is definitionally not good for Ontario’s and Quebec’s manufacturing center. Those in central Canada have reason to look askance at the western resource economies.
Nothing great about it