Northern Economist 2.0

Sunday, 13 July 2025

The Canada-U.S. Trade War: Why No Recession Yet?

Despite the continual onslaught of announced American tariffs and what one would expect would be a major slowing down of our economy, Statistics Canada reports the June employment numbers have exhibited a surprising resilience. In turns out employment increased by 83,000 (+0.4%) in June and the employment rate rose by 0.1 percentage points to 60.9% while the unemployment rate fell to 6.9%.  For a country that is apparently undergoing the hardship of the Trump-Led War on Trade, this is not exactly an economic apocalypse.

This has of course already been noted by other economic observers such as RBC economics which has attributed the resiliency to “the USMCA, which shielded Canada from some of the harshest tariff measures—ultimately making it the least affected U.S. trade partner rather than one of the most, as was originally feared.”  Despite announcement of double-digit tariff rates, the effective tariff rate on Canadian goods prior to all of the tariff chaos was 2.5 percent and is now at 4.6 percent.  While not ideal, it is not the end of the world for Canadian exports to the United States.

The other thing that has been going on and is perhaps contributing to the increased resilience of the Canadian economy despite hits to sectors like aluminum and vehicle manufacturing is that Canadians themselves have been retaliating to U.S. economic actions in a pretty coherent self-organizing fashion.  Without any official central direction, Canadians have been more likely to shop and travel domestically and reorient their spending away from the United States and into Canada. 

For example, take travel to the United States. As noted recently by Statistics CanadaWhile Canadian-resident return trips from overseas countries increased 7.3% from June 2024 to 876,800 in June 2025, Canadian-resident return trips by air from the United States dropped 22.1% to 363,900.” As well, “in June 2025, the number of Canadian-resident return trips by automobile from the United States totalled 1.3 million, a steep decline (-33.1%) from the same month in 2024 … June 2025 marked the sixth consecutive month of year-over-year declines.” This is a major reorientation of travel expenditure away from the United States and back into Canada.  Moreover, there is apparently an uptick in European visitors who are choosing Canada over the U.S.

And then there is the matter of domestic consumer spending away from U.S. products which American visitors to Canada have noted even if the wide swath of the American public is oblivious to this type of shift.  Again, in a pretty much self-organizing fashion, many Canadians are making choices to not buy American when they can, which is a difficult activity given the plethora of American products in our stores after decades of intertwined economies.  As noted in the New York TimesA recent Ipsos poll found that three-quarters of Canadians surveyed said they intend to forgo travel to the United States, while 72 percent said they will avoid buying U.S.-made goods. American brands have even jumped on the bandwagon, with companies like McDonald’s stressing their Canadian ingredients.”

The danger here  to United States is that even if and when relations between the two countries go back to some semblance of “normalcy”, a disruption in patterns of behaviour is likely to have some long-term effects.  For example, many Canadians have traditionally equated travel with trips to the United States because it is an interesting place to visit and convenient to access relative to even their own country.  Now, that they have been given the opportunity to try something different, some of that change will remain afterwards.  Combined with attempts underway to shift trade patterns away from the U.S. not only in Canada but the rest of the world, some of these shifts are going to be permanent.

In the interim, spending more Canadian dollars domestically rather than on American imports of goods and services (which includes travel) means that our marginal propensity to import from the United States is falling and the marginal propensity to consume domestically is rising. Remember your simple first year economics macro model of income determination and the expenditure  multiplier with taxes and trade?

Y = A[1/(1-z)]

Where z = MPC(1-t)-m and with Y as national income or GDP, A as autonomous expenditure (exogenous consumption, investment and government spending and including exports), MPC as the marginal propensity to consume, t as the tax rate and m as the marginal propensity to import.  Using this, we can construct a simple example to show what happens when the MPC goes up and m goes down.

According to my ChatGPT query, Canada’s nominal GDP is currently at about 3 trillion dollars. It suggested a marginal propensity to consume of 0.8 is what the Bank of Canada often uses in its models and that a marginal propensity to import of 0.3 is reasonable. As for the tax rate, based on total tax revenue for all three levels of government to GDP, a rate of 0.35 is reasonable.  Plugging these numbers into the formula with a GDP of 3 trillion dollars, you get an expenditure multiplier of 1.28 and autonomous expenditure of 2.34 trillion dollars.

Suppose that the propensity to import goes from 0.3 to 0.25 while the marginal propensity to consume domestically goes up to 0.85. The value of the multiplier goes up to 1.43 and given the autonomous spending of 2.34 trillion, GDP now rises to 3.36 trillion dollars – an increase in GDP of over 11 percent.  Naturally, rising economic output should  be accompanied with a fall in the unemployment rate. It should also be noted that our exports to the United States (which is in the autonomous spending component) have been taking a hit so this would somewhat counter any rise in GDP from the effects of increased domestic spending.

My point is that lowering our marginal propensity to import and redirecting it towards consumption of domestic items is likely going to have an effect that at least partially counters the drop in our exports and therefore helps stabilize the Canadian economy during the impact of the tariff and trade dispute with the United States.  The extent to which this may or may not be happening is of course an empirical question but the evidence to date suggests that Canada’s economy has been more resilient in the face of tariffs than expected meaning that there may indeed be such an effect underway. The clearest evidence is that tariff war or not, there is no recession yet.

Even more important, this resilience is not the result of direct government actions, but a result built on the responses of individual Canadians.  It really is the most effective response of all.


 


Thursday, 10 July 2025

Long-Term Municipal Debt in the Northern Ontario Big Five

 

Well, I have been reacquainting myself with municipal debt in Ontario over the last little while culminating in this short piece for the Fraser Institute and a discussion with Jonathan Pinto’s Up North focusing on northern Ontario and Sudbury in particular. There is also this interesting item regarding Farquier-Strickland which suggests that some smaller and more rural Ontario municipal governments are under quite a bit of stress and that large debt loads can have an impact on the long term financial sustainability of municipal finances.  In any event, municipalities going bankrupt in Ontario is something out of the 1930s and most of the current regulations governing municipal finances were a response to the financial turmoil of the Great Depression. 

It turns out that during the Great Depression: “By 1935, 20 percent of Ontario municipal debt was in default (Hillhouse 1936). During the early 1930s, more than 40 Ontario municipalities and school boards defaulted on their obligations.” [Cote and Fenn, 2014]. It is this historical context that haunts some of us as municipalities take on debt even though current debt burdens are well within the debt service requirements of provincial regulation in Ontario and for the most part (Farquier-Strickland excepted I suppose) Ontario municipalities have built up substantial reserves. 

Nevertheless, it is worth monitoring municipal debt levels and the accompanying figure presents the total long-term debt of the big five northern Ontario municipalities from 2000 to 2023 with data obtained from the multi-year reports of the Ontario government’s municipal Financial Information Review.  In 2000, the total debt burden of these five municipalities was relatively closely clustered with Greater Sudbury at $13.3 million, Thunder Bay at $45 million. The Sault and North Bay at $26 million respectively and Timmins close to zero. Things have progressed since then, though for the longest time it was Thunder Bay that was the long-term municipal debt outlier zooming ahead of the others such that by 2008 it peaked at $230 million before coming down somewhat.  Nevertheless, until 2019 it still had the largest total debt of any of the northern Ontario big five.

 

 

Starting in 2019, Greater Sudbury began to ramp up its municipal debt– after a more modest ramping up from 2014 to 2019 – and from 2019 to 2020 went from $70 million to $262 million.  By 2023 it had reached $325 million and is apparently poised by 2027 to reach $600 million. As of 2023, the northern Ontario big five collectively had nearly $700 million in Ontario debt.  With Sudbury’s ramping up to $600 million along with other anticipated expenditures in these other major northern Ontario cities, the total should surpass $1 billion by 2027.  Debt service costs on this debt in the case of Sudbury will likely double from the current 3-4 percent of total own source revenue but remain well within the provincial guideline of no more than 25 percent. Still, all other things given, more money for debt service means less money for current programs.  It is a trade-off that needs to be considered.

Thursday, 3 July 2025

Thunder Bay Is Not Growing Where It Should

 

Thunder Bay has embarked on a plan to build and diversify the municipal tax base and attract more residents.  This plan for growth is seen as an imperative given that Thunder Bay’s economy while not shrinking in absolute terms is nonetheless growing less slowly than Ontario and Canada.  For example, over the 2010 to 2024 period, Thunder Bay’s average annual real GDP growth was 1.8 percent compared to Canada’s 2 percent or Ontario’s 2.1 percent.  Employment has also shown this differential given that between 2006 and 2024; Thunder Bay added 9 percent more jobs to its economy while Ontario and Canada both added about 27 percent more jobs. 

So, the focus is on growth and a large part of that growth is on growing our population.  Population growth is of course correlated with economic growth as more people usually means more economic activity and therefore a larger economy which in turn should spillover into growth of taxable assessment.  This is a key concern for the City of Thunder Bay given that it is the anemic growth in taxable assessment that have helped shift an ever-larger tax burden onto the residential tax base given the decline in the industrial tax base of forest product mills and grain elevators over the last tree decades. 

Of course, simply growing population in Thunder Bay is not the panacea that one might think when it comes to increasing taxable assessment.  The reality is that population in the Thunder Bay area is increasing and has been for some time.  However, the population of the City of Thunder Bay has not been increasing relative to its surrounding areas.  If more people live around Thunder Bay but they are not owning homes and businesses within the confines of the City of Thunder Bay, then the impact on the city’s taxable assessment is going to be rather muted at best.  As the accompanying figure shows, there is a difference between population growth in the City of Thunder Bay and the Thunder Bay Census Metropolitan area.  Population statistics for the CMA are from Statistics Canada counts while the City of Thunder Bay’s population is taken from the Ontario Ministry of Municipal Affairs Financial Information Returns.

The results are plotted for the period 2001 to 2024 and are quite interesting. According to the official numbers compiled  by the Ontario government, the City’s Thunder Bay’s population in 2001 was surprisingly just over 115,000 while the CMA population was about 126,000.  During the first decade of the 21st century – the period of the forest sector crisis – the CMA population declined by 1.2 percent while the city proper itself declined by 5 percent.  Since 2010, there has been growth in the CMA population going from 125,000 to 133,000 for an increase of 6 percent.  The city population itself has gone from 109,140 in 2010 to 108,843 in 2023 – a slight decline.  However, since 2016 – which is when population began to grow more robustly in the CMA, the city population has indeed grown by about 1 percent.

 



The point is that Thunder Bay is growing but not necessarily where the taxable assessment needs to be to broaden and diversify the municipal  tax base.  True, if the CMA population goes up, more businesses are likely to open in the city thereby expanding the business tax base, but a lot of growth is nevertheless occurring outside of the city boundaries.  What is more interesting according to these numbers is the following. Between 2001 and 2023, the Ontario Ministry of Municipal Affairs numbers put Thunder Bay’s population going from 115,000 to about 109,000 – a decrease of about 5 percent.  Municipal taxes per household have gone up from $1,947 dollars in 2001 to $4,070 in 2023 – an increase of over 100 percent - while water and sewer charges have gone from $379 in 2001 to $1,195 in 2023 – an increase of over 200 percent.  Meanwhile, total municipal employment over the same period went from 2,344 (FT, PT and Seasonal) to 3,122 – an increase of 33 percent.

Is it any surprise that population outside of the city boundaries has grown while the city proper has either declined or remained stagnant?  When choosing where to live in the Thunder Bay area, there has clearly been a substantial number of people voting with their feet.  The surrounding townships offer a lower municipal tax burden while providing access to whatever Thunder Bay proper has to offer.  If the City of Thunder Bay itself is to grow its population and economy, it will need to address the fundamentals that have fostered this shift outside the city.