Will the Resilience Peter Out?

The summer saw a gradual clarification of US tariff policy. After a series of announcements, reversals, and temporary truces—particularly with China—the United States stepped up negotiations, exemptions, and deadline postponements. By August 1, the imposition of tariffs on several sectors (steel, aluminum, copper, lumber, etc.) had been formalized and partial agreements had been made with a number of partners such as Europe, Japan, and the United Kingdom. These have helped ease trade jitters, but they don’t change the underlying fact: tariffs are here to stay. CUSMA still protects a large share of Canada’s exports, but unprotected sectors have been hit hard: 60,000 manufacturing jobs have been lost since January, with shutdowns in auto production in Ontario and the forestry industry in Quebec. But, unlike in 2008, this shock hasn’t spread to the broader economy: stock markets have rallied, consumption is holding up and the global economy has avoided a collapse. But the risk is still there, especially since Washington wants to impose even more tariffs. Semiconductors and pharmaceuticals are in the crosshairs, and CUSMA will soon be up for review. The US government has already kicked off the review process by launching public consultations.

These are the circumstances in which the Carney government will release its first budget on November 4. Getting the math to add up will be tough, given the challenges: rearming the country and speeding up infrastructure construction, while simultaneously lowering public spending. The government has set ambitious targets. It wants to ramp up defence spending to 2% of GDP by the end of this fiscal year and 3.5% by 2035, invest $25 billion of public funds in “nation-building” infrastructure, and cut back on program spending.

Concerns have been raised over Canada’s credit rating. We believe the risk of a downgrade remains low External link.. But if, as some rumours suggest, the deficit blows past $100 billion, the budget will face unusually tough scrutiny from investors. Their verdict will hinge on two key factors: 1) the plausibility of plans to shave 15% off program spending by 2028 and 2) the feasibility of plans to implement nation-building initiatives—including timelines, governance and metrics.

The time for bold declarations is over. What matters now is the nitty-gritty of executing “nation-building” projects, including how to address the knock-on effects of certain measures. For example, in the construction industry, competition for labour and inputs may well intensify, even as scarcity and price pressures already pose significant challenges. Ultimately, the credibility of Carney’s economic vision depends on his ability to follow through. Without that, even the best ideas will be left on the drawing board. Currently, our forecast sees growth picking up in 2026, primarily fuelled by public investment. But that’s still a preliminary estimate pending further information.

As for consumers, a curious contradiction has emerged. Although confidence has sunk to recession levels, household spending surged in the first half of 2025. The real estate market in Quebec surprised to the upside, while Ontario’s and British Columbia’s showed signs of stabilizing. But consumer fundamentals are deteriorating. Unemployment is rising—not because the labour force is expanding, but due to the roughly 100,000 job losses recorded over the summer. Although at first unemployment mostly affected youth External link. and newcomers, it’s now increasing among core-aged workers (ages 25 to 54). The unemployment rate for this age group is the highest it’s been since 2016 (excluding the pandemic). In July, the number of 25‑ to 54‑year-olds receiving regular Employment Insurance benefits was 15.1% higher than it was 12 months ago. If unemployment really starts to hit this demographic, which accounts for the highest average household expenditure, the main driver of consumer demand would falter. In short, while the link between consumer confidence and spending may have blurred, the relationship between income and consumption remains unshakeable—and several key indicators have recently begun to flash warning signs.

Rapid population shifts represent another challenge. After a post-pandemic spike, demographic growth has plummeted: There are fewer permanent residents, workers and international students. Quebec, British Columbia and the Atlantic provinces are experiencing negative natural growth. Aggressive cuts to immigration have negative implications for potential growth and will lead to mounting fiscal pressure as the dependency ratio increases. Striking the right balance between economic imperatives and the capacity to absorb newcomers remains a pressing challenge.

All things considered, we’ll have to wait and see how a number of variables play out. A painful recession or broad-based contraction has yet to materialize, at least for now, and uncertainty seems to have become part of the new normal. But it’s not always the initial shock that does the most damage. The real harm often comes later, when paralysis sets in. If businesses and households hold back on spending or investment out of concern that the rules are shifting too quickly, inertia could take hold. Right now, the priority for policymakers is clear: to carve out pockets of predictability in an increasingly unpredictable landscape.