Lorne Gunter: Canadian economy struggles as Carney Liberals waste time

Canada is drifting into a classic balance-sheet recession setup: households already near the ceiling on leverage leave consumption highly rate-sensitive, so even modest credit tightening can keep domestic demand weak for quarters longer than policymakers expect. That matters because the transmission mechanism from policy to growth is now unusually one-way: higher debt service suppresses spending, weak spending pressures small businesses, and weak business formation keeps wage growth and hiring soft. In that regime, “stimulus” often leaks into higher imports, not better domestic productivity.

The deeper market implication is that Canada’s underperformance is less a growth story than a capex-discount story. If investors conclude permitting, carbon pricing, and subnational fiscal stress will keep hurdle rates elevated, the country’s risk premium stays sticky even if headline deficits stabilize. That disproportionately hurts domestic cyclicals, banks, and rate-sensitive real estate, while indirectly benefiting multinational exporters and foreign firms with cleaner operating jurisdictions or stronger pricing power.

The contrarian angle is that consensus may be overpricing the permanence of this malaise in the near term. A single credible pipeline/industrial-policy breakthrough or a sharp labor-market normalization from immigration caps could produce a relief rally in Canadian assets without fixing the structural issue. But absent a visible step-down in deficit issuance or a measurable turn in business investment, any bounce is likely tactical rather than the start of a re-rating.

The highest-risk tail is not a crisis today but a slow grind: persistent weak growth plus high debt raises the odds of a future housing-led credit event if unemployment ticks up. That would hit the banks and domestic retailers first, then spill into provincial credit and housing-linked municipal finance over 6-18 months. The key catalyst to watch is not GDP prints alone, but whether business closures and delinquency data begin to validate a broader balance-sheet squeeze.