Mark Carney addresses the media behind a podium. ” width=”970″ height=”671″ data-caption=’Mark Carney, a former central banker, replaced Justin Trudeau as Prime Minister and Liberal Party leader as the country faced a trade war with the United States. <span class=”lazyload media-credit”>Minas Panagiotakis/Getty Images</span>’>
Canada’s new prime minister, Mark Carney, has promised to take a hard line against the U.S., pushing back on tariff and sovereignty threats from the Trump administration while reining in government spending at home. But his fight with Washington may collide with economic reality: tariffs could tip Canada into recession, requiring more government spending, not less.
Carney, sworn into office on Friday (March 14) after replacing incumbent Justin Trudeau in Liberal Party elections, is an expert in managing economic crises. He previously led the Bank of Canada during the 2008 Financial Crisis and the Bank of England during Brexit from 2016 to 2020. Winning 85.9 percent of Liberal Party members’ votes, he promised that Trump’s trade war would not threaten Canada’s sovereignty. “In trade, as in hockey, Canada will win,” he said in his victory speech earlier this month.
Earlier this month, the U.S. imposed a 25 percent blanket tariff on most imports from Canada. (The tariffs were later lifted for automobiles and goods protected by the 2018 US-Mexico-Canada trade deal). Oxford Economics and Canada’s Desjardins Group, the largest federation of credit unions in North America, expect that the 25 percent tariff on Canadian goods could push the country into recession. The Canadian government has since retaliated with a 25 percent tariff on $21 billion worth of U.S. steel and aluminum exports.
The U.S. tariffs could be the final blow to Canada’s already ailing economy. Stephen Johnston, director of Omnigence Asset Management in Calgary—a major Canadian asset management group—argues the country is already in stagflation: the economy grew only 1.2 percent and 1.3 percent in 2023 and 2024, respectively. Even before the tariff threats, Canada’s labor productivity was slowing, housing prices were skyrocketing, and per-capita real GDP declined in 2024. The OECD expects Canada to experience the lowest economic growth between now and 2060 among its 38 member nations.
The economic picture being painted is at odds with Carney’s proposal to cap the federal workforce expansion, limit spending, balance the budget within three years, and run only a “small deficit.” While likely helpful to the Canadian government’s long-term balance sheet, modern Keynesian economics suggests a weakening economy requires more investment and stimulus to jumpstart growth. These are the same fiscal policies major economies used to end recessions during the 2008 Financial Crisis and the Covid-19 pandemic—tools Carney knows well, having expanded the money supply and increased liquidity as Governor of the Bank of Canada in 2008.
Carney’s economic austerity promises are an attempt to strike a balance between the Liberal Party’s tradition of generous spending and the growing threat posed by the Conservative Party’s platform of fiscal cuts. Carney is set to face off with Opposition Leader Pierre Poilievre in national elections this October, which could end his premiership shortly after it began.
Carney has agreed to meet with President Trump “under a position where there is respect for Canadian sovereignty,” he said in a statement on March 12. Negotiations will be a crucial step toward ending the ongoing trade war between two historically allied countries, but they mark only the beginning of a long road to recovery for Canada.
