The victory of the Liberal Party in Canada’s federal election opens the door for spending measures that could support the country’s economy, helping to weather trade tensions with the U.S.
The Liberal Party secured a minority government and Mark Carney, the former central bank governor of the Bank of Canada and Bank of England, will remain as prime minister. In addition to trade issues, Carney and his team will have to address other structural challenges, such as economic productivity and the housing shortage.
The fiscal plan presented during the campaign emphasizes substantial investments in infrastructure, defense and social programs, as well as tax relief.
“The extent of the fiscal measures will depend not solely on the Liberal Party, as the new Liberal-minority government will have to negotiate with at least one other political party to pass any legislation,” says U.S./Canada Economist Lenoy Dujon. “Meanwhile, the Conservative opposition could enter a period of uncertainty and reduced effectiveness, as their leader, Pierre Poilievre, lost his seat.”
A Shift in Trade Relations with U.S.
After the U.S. raised tariffs on Canadian imports, trade became a central theme of the political campaign ahead of April 28 election. The Carney administration will most likely maintain levies on U.S. goods until reciprocal tariffs are lifted.
“Looking ahead, we believe that Canada-U.S. trade relations are poised for a significant shift,” Dujon says. “Prime Minister Carney will likely want to focus on the diversification of trade relationships, trying to strengthen ties with Europeand Asia, even as the U.S.-Canadian trade relationship will remain front and center given that the USMCA (U.S.-Mexico-Canada trade agreement) review is approaching.”
As part of its economic strategy for the coming years, the Liberal government may also seek to remove internal trade barriers to encourage domestic economic integration, which would also help mitigate the impact of U.S. tariffs.
BoC May Hit Pause Button
The possibility of looser fiscal policy from the Carney administration may influence the outlook for monetary policy and interest rates. The Bank of Canada could cut rates at a slower pace or even less than expected, as more expansionary fiscal policy is usually supportive of economic activity.
“Lingering downside risks to the economy could keep the door open for the Bank of Canada to continue cutting this year,” says Dujon. “However, recent communication shows the Bank has no problems with hitting the pause button as needed to assess the uncertain economic landscape and wait for more clarity before determining its next move.”
Gains for Canadian Dollar
The fiscal measures proposed by the Liberal Party during the campaign could provide a buffer against risks to Canadian growth, resulting in more strength for the country’s currency, Morgan Stanley strategists Andrew Watrous and Zoe Strauss say.
“We see the Liberal Party winning the election as a positive development for the Canadian dollar, albeit not as positive as an outright majority would have been,” Watrous and Strauss say. “A majority government would have provided greater political stability and predictability than a minority government, benefiting the Canadian economic outlook during the current uncertain times.”
