The US-Canada Partnership: North America’s Economic Outlook

The US-Canada economic relationship is responsible for millions of jobs and generates billions in trade.

Against this backdrop, the USMCA – the updated North American Free Trade Agreement – will become eligible for review in 2026. As Ian Bremmer, President of Eurasia Group, pointed out in his opening remarks at the second annual US-Canada Summit hosted by BMO and Eurasia Group, that’s relatively soon, especially when you consider no one knows for sure who will be leading those discussions in Washington and Ottawa.

This is no time for complacency. As Bremmer and Darryl White, Chief Executive Officer of BMO Financial Group, explained in a recent op-ed, “In the face of increasing geopolitical competition to North America’s advantage, business and political leaders have a responsibility to promote this partnership.”

Unpacking the political and economic opportunities and risks facing this relationship was the focus of Bulls, Bears, and Beavers – North America’s Economic Outlook, a panel discussion that I joined. The panel also included:

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  Elizabeth Baltzan, Senior Advisor, United States Trade Representative

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  Frances Donald, Global Chief Economist, Manulife Financial

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  Randal Quarles, Chairman, Cynosure Group and Former Vice Chair, the Federal Reserve

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  Hosted by Kevin Carmichael, Economics Columnist, The Logic

Here are some of the main takeaways from the conversation.

While the U.S. and Canada have effectively escaped recessions, the Canadian economy is nonetheless decelerating, at least over the short-term, an assessment made by Manulife’s Frances Donald during the discussion: “Canadians feel very much like they’re in a recession, even as economists say that’s not the case,” she said. Although Canada continues to add jobs, consumers are reining in spending. By contrast, U.S. consumers have been far more resilient.

A key difference is between the U.S. and Canadian housing markets. As Donald explained, Canadian homeowners are more sensitive to interest rate changes and face elevated home prices in major markets. Unlike Canada, where mortgage rates are typically renegotiated every five years, U.S. mortgages come with different types of home loans, including a 30-year fixed-rate option, offering consumers a little more stability.

Apart from differences in the housing market, Donald said Canada also lags about “40 years behind the U.S.” in terms of productivity. Still, the difference between the two countries cuts both ways, with Canada having the edge in interest costs and the national debt.

Over the medium term, we expect the two economies will get back in sync. When that process starts in the next few years, it could mean Canada will slightly outperform as interest rates decline and alleviate pressure on more debt-burdened Canadian households.

The structural differences between the Canadian and U.S. economies could lead to differences in interest rate policy. While Canada has already started its rate-cutting cycle, the U.S. is likely to leave interest rates higher for longer, said Randal Quarles of Cynosure Group. “One of the issues is that the economy hasn’t slowed down enough,” said Quarles, a former Federal Reserve official, noting that U.S. businesses, like homeowners, haven’t had – or been willing – to refinance at higher rates.

However, that sentiment could shift as more debt securities are expected to mature over the next year, said Quarles. “That’s going to result in a significant increase in debt service costs.” All eyes are on where the Federal Reserve goes from here. At their most recent policy-setting meeting in June, the Fed indicated expectations of one rate cut in 2024 and four in 2025.

Quarles, who described himself as a “hawk” during his time on the committee, said he thinks a cut could come at the end of the year but adds he wouldn’t be surprised if there were none at all, given the way inflation is evolving.

One theme that repeatedly came up during the summit was the importance of the USMCA, which is due for review in 2026.

As Elizabeth Baltzan with the United States Trade Representative’s office said, this review period will be about ensuring the terms of the deal are fit for purpose. Both Baltzan and Donald stressed the need to focus on the real economy when discussing trade policy.

Keeping that in focus could be critical to ensuring the North American economy is strong enough to withstand many of the geopolitical disruptions that have surfaced in recent years. “It used to be that the only right way to think about trade between nations is to take the barriers down,” she said. “With the pandemic and the Russian invasion of Ukraine, we’ve now seen the limitations of that approach.”

It’s imperative that our leaders work to minimize any disruption during this review period. I echo the comments Ian Bremmer made: “Cross border agreements can be easy targets in environments like this,” he said. “We can’t afford to let the extraordinary consumer benefits of our continental collaboration get lost in the midst. Private and public sector leaders must ensure that Main Street benefits from a deeper partnership in an increasingly complex world.”

Despite the differences between the Canadian and U.S. economies, I would say there’s cautious optimism among businesses. After coping with the challenges of the past few years, they’re now looking to return to growth. On both sides of the border, companies are considering onshoring, automation and other ways to improve productivity, and that takes investment.

Companies for the most part have done their part to get their balance sheets in order so they can make these investments now and in the future. They’ve been keeping an eye on expenses, while moderating inventory levels and managing their working capital. That patience and vigilance will be beneficial. When rates do come down, demand will go up, and these businesses need to be able to boost productivity and production. I think they are ready for it.

I spend a lot of time in both the U.S. and Canada talking with our clients, and in a world full of increasing competition and emerging world powers, the predictability of relations between our two countries puts us in an enviable position when it comes to economic growth, resulting in cautious optimism among businesses