Canada’s new Prime Minister Justin Trudeau faces an early end to his political honeymoon, confronted by an economic slump with no easy exit.
While voracious demand from China for its commodities helped Canada escape the worst of the 2008 financial crisis, the communist-run country’s diminished appetite and a global oil glut have turned into a massive headwind for Canada.
The parallel decline of oil prices and the Canadian dollar, which the central bank governor describes as following each other like “railroad tracks”, is bringing both economic and political pain.
With a comfortable majority from last October’s election, Trudeau’s Liberal government will have no problem passing laws in Parliament.
But his political capital will melt away quickly if he mishandles his first major test over the economy. It would damage provincial allies and the Liberal party’s prospects in the 2019 election.
Trudeau, 44, branded as a lightweight by opponents in last year’s campaign, will have to ensure that the oil shock does not trigger vulnerabilities such as Canada’s record high household debt levels and long-in-the-tooth housing boom, creating vicious cycle of job losses and further weakness.
The central bank’s oft-stated hope that rising non-energy exports would drive the economy and help offset the oil crash has not materialised. This is partly because in the manufacturing centre of Ontario, auto companies have shifted plants and work to lower-cost jurisdictions such as Mexico.
In Quebec, the provincial government bailed out struggling planes and train maker Bombardier Inc for fear of losing 40,000 aerospace sector jobs in the province.
“The engines for growth in Canada are really few and far between,” says David Rosenberg, chief economist with Gluskin Sheff + Associates, who predicted the US housing crash while at Merrill Lynch.
The Canadian economy, which endured a mild recession in 2015, saw zero growth at the start of the fourth quarter. A government projection in December showed a planned tax hike on the rich will not cover the cost of a promised middle-class tax cut.
The Bank of Canada lowered its forecast for 2016 growth yet again this month, to 1.4% from 2.0% in October.
Canadian oil sands crude fell 60% from a year earlier to trade below $14 a barrel last week , leading to weaker business investment and big job losses in the western oil producing provinces of Alberta and Saskatchewan.
The impact has been felt on the other side of the country, where workers who migrated from Atlantic Canada to the oilfields return home in droves, unemployed.
For his part, Trudeau remains upbeat, touting economic diversification “after a time in which we had put all our eggs in one basket”.  
But it will be a Herculean task.