Structural change reshapes Canada's economy and policy path
Bank of Canada Governor Tiff Macklem outlined the profound structural changes reshaping Canada's economy, driven by US protectionism, artificial intelligence, and shifting demographics. He emphasized that these forces will permanently alter economic activity and require careful navigation to preserve price stability.
A convergence of structural breaks
Canada is at a crossroads, facing deep structural changes that are transforming its economic landscape.
These are not temporary cyclical fluctuations but permanent shifts in the level or composition of economic activity, altering what and how much the economy can produce at full capacity without causing inflation.
Today's rapid change stems from a convergence of structural breaks: the end of rules-based open trade with the United States, the looming potential of artificial intelligence (AI), and declining population growth.
While AI promises higher productivity and living standards, US protectionism is reversing trade gains, increasing costs and reducing efficiency.
Lower population growth also pulls down trend GDP growth by reducing new consumers and workers, impacting economic potential.
Modest growth amid trade friction and slow population
The Bank of Canada forecasts modest economic growth, averaging only about 1¼% over the next two years, reflecting both cyclical weakness and structural change.
US tariffs have significantly reduced exports, though some recovery is anticipated along a lower trajectory.
Business investment remains subdued due to heightened uncertainty but is expected to strengthen as firms adapt.
Household spending should grow moderately, supported by previous interest rate cuts.
Inflation is projected to remain near the 2% target, with tariffs adding some upward pressure, balanced by cyclical demand softness.
The CUSMA review and geopolitical risks continue to weigh on the economic outlook.
Navigating a permanent economic shift
Monetary policy cannot alter the destination of structural change but can help smooth the journey, preserving price stability through economic upheaval.
The Bank of Canada's role is not to mitigate these deep shifts, which demand adaptation from businesses, workers, and governments.
Failure to restructure could lead to weak productivity, lower incomes, and worsening affordability, making Canada a less attractive place for investment.
Source: Structural change—Canada at a crossroads
IN: