In this week’s The Seven… 

• Policy flurry - Federal government makes first moves
• Hitting 2% - Implications of new military spending
• Household finances - Resilient, but risks elevated
• Time to get more productive - Broad-based slowdown in Canada
• Finding work - A tough job market for youth
• Interesting Fact: Global military spending
• Chart of the Week: Productivity and wages by industry

We’ve gone from tracking tariff announcements to Canadian policy as the new federal government makes its first moves. All while watching the Oilers tying the Stanley Cup series 2-2 last night, an economic win for the City of Edmonton.

On the trade front, rumours swirl that Trump and Carney are closing in on some type of trade ‘deal’. The U.S. and China, meanwhile, are moving closer to a deal that largely takes them back to where they were a month ago.

From Sunday to Tuesday, Canada is hosting the G7 leaders in beautiful Kananaskis, Alberta during a period of trade tensions after hosting the world for the Global Energy Show this week. Relevant to Alberta, “building energy security” is on the agenda, which creates a pathway to talk about Canada’s role, particularly with regard to liquified natural gas (LNG).

Also this week, U.S. inflation data did not change the consensus view that the Federal Reserve will hold next week.

Closer to home - Flurry of federal policy announcements

Since Trump’s inauguration and repeated tariff and 51st state threats, the rallying wake up call for Canada has been along the following lines: 1) get stuff built; 2) tear down interprovincial trade barriers; and 3) expand into overseas markets.

Last week, the Carney government introduced “One Canadian Economy” legislation designed to address project approvals (the target is 2 years) and a framework to remove interprovincial barriers.

These are signals in the right direction, but there are many missing details. What projects will be eligible? How will faster project approvals work while keeping existing legislation (e.g. Impact Assessment Act)? Strong partnerships with Indigenous communities are key—how will this be achieved? Shifting to “mutual recognition” for removing internal trade barriers sounds promising, but how will this be implemented?

New military spending - Sorting out the economic implications

The federal government this week said it will significantly boost military spending to meet NATO's 2% of GDP target by early next year, much sooner than planned. This involves an extra $9 billion in 2025-26.

Higher defence spending can provide a much-needed lift to economic growth and potentially reduce reliance on foreign suppliers if procurement focuses domestically. From our perspective, the biggest upside is the potential to address Canada’s ailing R&D performance, a contributor to weak productivity as we’ve discussed.

The defense sector is research-intensive, with over three times the R&D intensity of the manufacturing sector. Increased R&D investment can drive technological innovation, especially in dual-use technologies (with both military and civilian applications) like cybersecurity and surveillance.

But in public policy, nothing is black and white. The key challenge is the pressure this puts pressure on Canada’s already stretched public finances, potentially crowding out other spending that could also boost the economy. There are also questions about Canada's industrial capacity to scale up quickly. How the spending is financed (cuts, taxes, or borrowing) and managed will determine its long-term economic impact.

What about Alberta?

Defence spending is highly concentrated in central Canada, with Ontario and Quebec accounting for 60% of defence industry employment according to Statistics Canada. Unfortunately Statistics Canada doesn’t publish an Alberta breakdown, but they report that Western and Northern Canada account for 20% of defence industry employment (well below their 33% share of the population). Major military bases in Alberta include Cold Lake, Suffield, Edmonton and Wainwright.

Household finances - Resilient, but risks elevated

Canadians are highly indebted, but at least the situation is stabilizing. Last quarter, the debt to disposable income ratio ticked up slightly to 174% ($1.74 owed for every dollar of disposable income), but still down from the $1.86 peak in Q4 2021.

We don’t have an updated tally for Alberta, but the latest data (Q4 2024) shows that Alberta has the third highest debt to disposable income ratio among the provinces at 158% after Ontario and B.C. However, as shown in the chart below, the ratio has come down from the peak in 2016 of well over 200%. Alberta’s higher debt ratio in part reflects a higher share of younger households in their high-debt years.

What does the Bank of Canada think about all this? Their latest financial stability assessment notes that the financial system is “resilient,” but that vulnerable households still face challenges.

In particular, they note that financial stress remains more elevated for non-mortgage holders, where arrears on credit cards and auto loans have picked up notably. This may surprise some readers. Much has been made of the mortgage cliff; that is, fixed-rate mortgages from low-rate periods will be renewing at higher rates. Indeed, the Bank estimates 60% of mortgages will renew in 2025 and 2026, leading to higher payments for many Canadians. With interest rates coming down, the Bank of Canada believes most will be able to handle these higher payments. Moreover, they note that 90% of mortgage holders with a five-year fixed-rate mortgage will face payments that are still lower than what they were stress-tested for.

While reassuring, we’d note still-elevated risks to employment and income from the trade war. If conditions deteriorate much further, it will become more difficult for households to service debt. We expect the next six months or so to be challenging before conditions gradually improve, assuming an expected shift to successful bilateral trade deals.

A tough job market for youth

As we highlighted last week, youth in Canada and in Alberta are facing a tough job market. The unemployment rate for youth (ages 15-24) was 17% in May in Alberta and 14% nationally.

What’s going on? The youth population has surged, and with it entry into the labour market. This creates more competition for available positions. At the same time, the job market has cooled alongside the broader economy as employers take a cautious approach to hiring amid trade uncertainty.

What’s unique about Alberta? The youth population growth is growing much faster in Alberta. As we’ve shown, Alberta was by far the largest net recipient of interprovincial migrants from other provinces. Job growth for youth year-to-date has been stronger in Alberta than the rest of Canada, but it has not kept pace with labour force entry.

We expect population and youth inflows to cool with new federal immigration targets, but that the overall unemployment rate will remain elevated in 2025 (our latest forecast has the unemployment rate averaging 7.6% this year)

Time to get more productive

The latest data for 2024 shows that Canada’s labour productivity malaise is widespread.   All provinces have struggled with productivity growth, and Alberta is no exception.

Last year, Canadian labour productivity—the value of output per hour worked—dipped to $63.2/hour, down 0.5%. That’s the fourth year in a row of declines, following a jump in 2020 (the first year of COVID was anomalous as hours worked dove, and output didn’t fall as much).

Every province in Canada saw weaker labour productivity last year, with Alberta down 1%.

This should not be a surprise. Canada, and especially Alberta, witnessed a population surge that was not matched by economic growth. Skills mismatches  - lots of people but not necessarily the right skills for the jobs vacant - has also been a challenge.

It’s not just a last year issue. The productivity problem in Canada has been around for a long time, with many factors contributing: commonly cited factors include low business investment, lack of scaling of small companies, low R&D and commercialization, and lack of competition

As for Alberta, we have explored in detail longer-term trends, and the recent arrival of the 2024 data do not change the general findings. Alberta’s weak productivity growth, relative to the country, over the last decade in large part reflects a shift in labour away from some of its most productive industries—primarily oil and gas extraction.

Despite the slowing trend, Alberta continues to have the highest labour productivity among provinces, followed by Saskatchewan and Newfoundland and Labrador. These provinces all have one thing in common—high concentration of output from the resource sector (see Chart of the Week).

Interesting Fact: Global military spending

According to the Stockholm International Peace Research Institute (SIPRI), the U.S. and China accounted for nearly half of the $US2.7 trillion of global military spending in 2024, at 37% and 12% respectively. Canada’s share was 1.1%.

As a share of GDP, the countries spending the most are Ukraine, Israel, Algeria, Saudi Arabia and Russia (all over 7% of GDP).

Chart of the Week: Productive energy

With Calgary playing host to the Global Energy Show this week, it's a good time to talk about the role the energy sector plays in the Canadian economy. Natural Resources Canada reports that the energy sector contributed $279 billion to nominal Canadian GDP (10% of total) in 2023 and 697,000 direct and indirect jobs (3.5% of total).

Less commonly cited is that oil and gas and adjacent industries have the highest levels of labour productivity. As one would expect, they also offer some of the highest wages. Our Chart of the Week shows productivity vs. wages for industries across the business sector, using recent 2024 results from Statistics Canada.

As we have shown, Alberta’s industry composition, with a higher share of workers in the energy sector, mainly explains Alberta’s productivity lead over other provinces.

Answer to the previous trivia question: The Edmonton Oilers have made the playoffs in 27 of their 45 NHL seasons.

Today’s trivia question: When was the employee punch-in time clock invented?