The American economy recorded an enviable growth of 3.1% in 2023. Quebec ended the year with stagnant gross domestic product (GDP). How can such a large gap be explained?
• Also read: Girard questions a return to balanced budget in 2027
• Also read: “A recession with a small “r”: What economic challenges await us in 2024?
Our neighbors to the south have not experienced the recession predicted by most economists, at least not yet.
The S&P 500 stock index just hit a new record, the rate of new business formation has reached new heights, while the unemployment rate remains historically low at 3.7%.
Strikes will have an impact
In Quebec, the unemployment rate of 4.7% remains well below the Canadian average of 5.8%. On the other hand, GDP fell in the second and third quarters of 2023, plunging the province into a technical recession. Public sector strikes last fall likely exacerbated the economy's decline.
Of course, Quebec has its own peculiarities, but its economy is still closely linked to that of the American giant, which receives three quarters of our exports.
So why is Quebec's economy stagnating while the United States' economy is, at least for now, simmering?
Rising interest rates are doing more harm here
Gardens
In Quebec and elsewhere in Canada, millions of homeowners have suffered or are bracing for the significant rise in interest rates. The hardest hit so far have been variable-rate mortgage holders, but by 2026, 60% of fixed-rate mortgages will need to be renewed, Royal Bank recently announced. In the United States, rising interest rates are much less damaging because most mortgages last… 30 years. “The average American is therefore much more resilient to monetary tightening,” points out Hendrix Vachon, senior economist at Desjardins.
Americans are consuming more and more
Royal Bank of Canada
Americans weren't afraid of a rise in their mortgage payments and continued to increase their consumer spending while Canadians slowed. “Americans are dipping into their savings to support their consumption,” Mr. Vachon notes. “Surprisingly, despite the interest rate hike, they are going so far as to use credit to maintain their consumption,” adds Matthieu Arseneau, deputy chief economist at the National Bank. Meanwhile, people in Quebec and Canada are putting money aside to prepare for rising mortgage payments, among other things.
Washington spends without counting
Bank of Canada
The Biden administration also did not shy away from massively supporting the American economy. “It is almost a recessionary stimulus plan that was introduced in the United States in 2023, when we were already at full employment,” Arseneau says, recalling the hundreds of billions of dollars in spending planned in three bills passed since 2021. The budget deficit reaches more than 6% of GDP in the United States, compared to 1.4% in Canada. Direct consequence: Business investment continues to increase in the USA, while it stagnates in Canada.
Falling productivity
Statistics Canada
For decades, productivity (GDP per hour worked) in Canada has been much lower than in the United States. However, business productivity in Canada has declined by an average of 0.3% per year over the past five years, while in the United States it has experienced an average annual increase of 1.7%. Economists say this growing gap is hurting the Canadian economy and contributing to the weakening of the Canadian dollar against the greenback. Note that productivity in Quebec is actually below the Canadian average.
Can you share information about this story?
Write to us or call us directly at 1 800-63SCOOP.