Why is the economy stagnating in Quebec while it is booming in the United States?

The American economy experienced enviable growth of 3.1% in 2023. Quebec, for its part, ended the year with a stagnant gross domestic product (GDP). How can we explain such a big gap?

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Among our neighbors to the south, the recession that most economists predicted has not materialized, at least not yet.

The S&P 500 stock index has just reached a new record, the rate of new business creation 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 declined during the second and third quarters of 2023, which plunged the province into a technical recession. Public sector strikes last fall probably accentuated the decline in the economy.

Of course, Quebec has its own particularities, but its economy is still closely linked to that of the American giant, which receives three-quarters of our exports.

So why is the economy stagnating in Quebec while it is bubbling in the United States, at least for the moment?

Rising rates hurt more here

In Quebec and elsewhere in Canada, millions of homeowners have suffered or are preparing to suffer the significant increase in interest rates. The hardest hit so far have been holders of variable rate mortgages, but by 2026, 60% of fixed rate mortgages will need to be renewed, the Royal Bank recently indicated. In the United States, rising rates hurt much less because most mortgages have terms of… 30 years. “The average American is therefore a lot more resilient to a tightening of monetary policy,” underlines Hendrix Vachon, senior economist at Desjardins.

Americans are consuming more and more

Not afraid of seeing their mortgage payments jump, Americans continued to increase their consumer spending while Canadians slowed down. “Americans are dipping into their savings to support their consumption,” notes Mr. Vachon. “Surprisingly, despite the rise in rates, they go so far as to use credit to maintain their consumption,” adds Matthieu Arseneau, deputy chief economist at the National Bank. Meanwhile, in Quebec and Canada, people are putting money aside, among other things, to prepare for rising mortgage payments.

Washington spends without counting

The Biden government did not hesitate to massively support the American economy either. “It’s almost a recessionary budgetary stimulus plan that was deployed in the United States in 2023 when we were already at full employment,” says Mr. Arseneau, recalling the spending of hundreds of billions of dollars 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 investments continue to grow in the United States while they stagnate in Canada.

Declining productivity

For decades, productivity (GDP per hour worked) has been much lower in Canada than in the United States. However, over the last five years, business productivity has declined by 0.3% per year on average in Canada, while in the United States, it has experienced an average annual increase of 1.7%. According to economists, this growing gap is harming the Canadian economy and contributing to weakening the Canadian dollar against the greenback. Note that in Quebec, productivity is even lower than the Canadian average.