What’s Driving Canadian Frustration With the Economy?

The federal finance minister has repeatedly told Canadians that, despite a rocky recovery from the pandemic, the economy is improving. Recent data point to lower inflation, falling interest rates and a recovery that avoided the deep recession many feared.

Inflation is at 1.6%, below the Bank of Canada’s 2% target. Interest rates have been receding quickly, with additional cuts anticipated. While economic growth remains modest, households have largely avoided a prolonged downturn.

Perhaps most notably, wages have outpaced price growth for 20 consecutive months, an encouraging signal for many workers. Yet a recent RBC analysis highlights a less uniform recovery, revealing “two contradictory trends” beneath those headline improvements.

Who has benefitted from wage growth in Canada? Who hasn’t?

RBC’s analysis shows the gains have been concentrated at the top. Over the past three years, the top 40% of earners captured roughly 70% of aggregate wage growth. That unequal distribution means many households have seen only modest real income gains, even as national averages improve.

On a per-person basis, household spending has declined, signaling tighter budgets for many families. Low- and middle-income households have devoted a larger share of their paycheques to essentials such as food and housing, while higher-income Canadians have continued to build savings.

“It’s very much a story of households in different income quintiles or different earnings brackets, if you will, are feeling the current economic environment very differently,” said RBC economist Carrie Freestone, the report’s author.

Part of that divergence reflects the Bank of Canada’s rate increases. Higher interest rates raised debt-servicing costs for households with mortgages or other loans, squeezing disposable income for many. At the same time, savers—who are disproportionately higher earners—benefited from improved returns on deposits and other interest-bearing accounts.

“The Bank of Canada is in a really tricky position,” Freestone added. “They obviously want to target the prosperity of all Canadians, but it’s very difficult to do that with monetary policy, because (they have) one tool.”

Who’s been the most impacted by inflation?

Economists often note that rising prices hurt low-income households the most. The RBC analysis finds middle-income earners have also been hard hit. In 2023, workers between the 40th and 60th income percentiles dedicated the largest share of their take-home pay to essentials since 1999.

That pressure helps explain why politically pessimistic messages about the economy have gained traction with parts of the electorate. Christopher Ragan, an associate professor of economics at McGill University, points out that the memory of financial strain lingers—especially for people who were unexpectedly hit by higher interest rates two years ago.

“People are still thinking about the pain that they felt unexpectedly two years ago, and some of that pain is still there on interest rates,” Ragan said. “So the government focuses on the reduction in inflation, but they don’t talk about prices still being high. They focus on the reduction in interest rates, but they don’t talk about the people that were hurt by the interest rate increase.”

Do Canadians ever feel good about the economy?

Stephen Gordon, an economics professor at Laval University, observes that public sentiment about the economy often remains negative even when indicators improve. From his view, Canada “dodged a bullet” by getting through a period of high inflation without a severe downturn linked to rate hikes. He notes median earnings have risen, which is a positive development for many households.

Gordon cautions against panic, while acknowledging longer-term challenges such as lagging productivity and persistent economic inequality. “It’s kind of hard to put things in perspective. Sometimes it’s hard to persuade people, you know, this is as good as it gets. There really never was a golden age,” he said.

In response to public worries about affordability, Finance Minister Chrystia Freeland began holding weekly news conferences last fall to highlight the government’s economic agenda and signal how improving indicators could translate into relief for households and businesses.

Freeland has repeatedly emphasized recent positive moves in monetary policy. On Oct. 29 she noted the Bank of Canada’s sequence of rate cuts and framed those reductions as meaningful relief for Canadian families and companies: more money staying in household budgets and greater breathing room for businesses.

What it means for the federal Liberals

Despite improving economic indicators, public opinion has been slow to shift in favour of the governing Liberals. David Coletto, CEO of Abacus Data, says Canadians’ concerns about costs—food and fuel, mortgages, housing and rental prices—remain entrenched, and perceptions have not yet budged.

Even a spring budget focused heavily on housing failed to close the Conservatives’ double-digit lead in many polls. Coletto allows there is a chance that better economic news could help the Liberals, but he warns their path is narrow given the prime minister’s low popularity ratings. “Time is running out, obviously,” he said.

Read more economic news:

• Canada’s economy news: Are we growing enough?
• Canada’s annual inflation fell to 1.6% in September
• Deloitte Canada predicts more economic growth, benchmark rate below 3% in 2025
• Is this a good time to buy a home in Canada?