Over the past eight years, Justin Trudeau's government has faced numerous challenges, from the SNC-Lavalin controversy to an old yearbook photo featuring the prime minister in blackface, multiple ethics violations, and the ongoing impact of the COVID-19 pandemic.
While navigating these storms, it is the slow-moving hurricane of the economy that now poses a significant threat to the governing Liberals. Although the pandemic may feel like a distant memory for many, its economic repercussions persist, causing electoral turbulence for incumbent governments globally.
Despite the Canadian economy exceeding expectations in various aspects, the lingering effects of high inflation and interest rates have left people feeling economically strained. This economic discontent is reflected in polls, with the governing party trailing the Conservatives significantly.
Cost-of-living issues have taken center stage in federal politics, and a resurgent Tory party is attributing the erosion of affordability directly to Trudeau's leadership. As the economic storm continues to brew, it may prove to be the factor that reshapes the political landscape.
When did things start going so wrong for the Liberals?
Support for the Conservatives gained momentum during the summer, coinciding with the Bank of Canada resuming interest rate hikes after a pause earlier in the year.
Tyler Meredith, a former head of economic strategy and planning for Finance Minister Chrystia Freeland, noted that this surge occurred as people began to cycle through the initial wave of mortgage renewals.
Canadians renewing their mortgages in the current climate are experiencing increased monthly payments due to higher interest costs, leaving them with less discretionary income.
While the federal government doesn't directly control interest rates, there's a noticeable correlation between the Bank of Canada's rate hikes and a decline in public support for the Liberals.
Even before the spike this year, polling by Abacus Data suggested that the Conservatives began overtaking the Liberals following the central bank's first post-pandemic rate hike in March 2022.
David Coletto, CEO of the Ottawa-based polling and market research firm, sees this as a turning point, noting that various polling indicators have shifted against the Liberals since then.
The federal government has been under continuous scrutiny, both from partisan sources and others, for its perceived involvement in the ongoing affordability crisis.
Certain economists have criticized Ottawa, accusing it of excessive spending in the midst of escalating inflation. According to them, this period required a pullback in fiscal policy.
Housing advocates, policy experts, and economists have additionally pointed fingers at the Liberals for what they perceive as a misalignment between housing and immigration policies. They argue that the combination of rapid population growth and limited housing supply has exacerbated the impact of rising interest rates on affordability.
The challenges faced by the Liberals are not unique to Canada but are part of a global phenomenon. Inflation has taken its toll on economies worldwide, prompting central banks to aggressively raise interest rates and leading voters to turn against incumbent governments.
This trend is evident in various countries. In the United States, President Joe Biden is grappling with near all-time low approval ratings, with an inflation rate of 3.2 percent in October. The Federal Reserve's benchmark interest rate is at about 5.4 percent, the highest level in 22 years.
Similarly, in the United Kingdom, Conservative Prime Minister Rishi Sunak's approval rating has plunged to a record low, even surpassing that of Liz Truss, who resigned after only 49 days in office. The U.K.'s inflation rate was 4.6 percent in October, with the Bank of England's benchmark interest rate at 5.25 percent. Despite falling inflation rates in these countries, incumbent leaders continue to face significant challenges.
In the Netherlands, despite a significant decline in inflation from its peak above 14 percent last year, concerns over immigration and its perceived impact on affordability led to the collapse of a four-party coalition government in the summer.
Last month's election saw the far-right Party for Freedom, led by Geert Wilders, winning the most seats. Wilders ran an anti-immigration campaign that also focused on the cost of living.
"Inflation’s a cancer on government popularity, and there’s no easy treatment," noted Coletto.
The response to high inflation has been robust but punishing. Central banks globally, including the Bank of Canada, have implemented substantial interest rate hikes, making borrowing more expensive for consumers and businesses. Currently, the Bank of Canada's key interest rate is at five percent, the highest since 2001.
This pullback in spending has had repercussions, slowing the Canadian economy in 2023 and contributing to an increase in the unemployment rate, trends that are anticipated to persist into 2024.
Despite these challenges, Canada's economy has outperformed expectations in recent years, rebounding strongly after the pandemic and achieving a near all-time low unemployment rate of 4.9 percent in the summer of 2022.
Despite forecasts to the contrary, Canada has managed to avoid a recession so far, and inflation has decreased to 3.1 percent, a significant drop from last year's staggering highs.
However, there is a prevailing sense of economic dissatisfaction, characterized as a "vibe-cession" by Meredith. Even though the country isn't officially in a recession, many people perceive and experience conditions that mirror a recessionary environment.
"To a lot of people, it looks and feels like a recession, even though we’re not actually in a recession yet," Meredith commented on this prevailing sentiment.
The Liberals face a political challenge in bridging the gap between negative public sentiment and the actual state of the economy, as noted by Meredith.
In contrast, Conservative Leader Pierre Poilievre has gained traction online with his assertive and straightforward cost-of-living message. His 15-minute video addressing the housing crisis has garnered millions of views on social media, attributing Canada's housing affordability issues to Trudeau.
Despite the current challenges, Meredith suggests it's premature to count the Liberals out. The political landscape can evolve significantly between now and the scheduled fall 2025 election, and economic conditions are expected to change by then.
Many economists anticipate that inflation will return to two percent by 2025, and the central bank is expected to begin reducing interest rates sometime next year.
While lower interest rates could signal a more positive economic outlook, it does not necessarily translate to lower mortgage costs for everyone. The central bank has indicated that interest rates may not return to pre-pandemic levels, even as inflation becomes more manageable. Consequently, many Canadians might renew their mortgages at higher interest rates despite a general decline in rates.
In terms of inflation, Canadians may still contend with elevated prices even if the rate of price growth subsides to two percent.
Given the prevailing concerns about rising costs, Meredith suggests that the Liberals need to convey a different economic message. He emphasizes the need to address the issue directly, saying, "To get over that, you have to get in front of the issue and say, 'Here’s what we’re doing to lower costs for you.'"
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