In a significant address on Thursday, Tiff Macklem, Governor of the Bank of Canada, emphasised the urgent need for the nation to adapt to substantial structural changes impacting its economy. Speaking to an audience in Toronto, Macklem painted a somewhat grim picture of the economic landscape, suggesting that the likelihood of further interest rate reductions is diminishing amid prevailing uncertainties.
Structural Changes Reshape Canada’s Economy
Macklem outlined three critical forces that are reshaping the Canadian economic environment: rising U.S. protectionism, the rapid advancement of artificial intelligence, and a notable decline in population growth. He cautioned that as the economy transitions through these challenges, growth is expected to remain modest.
“The Canadian economy must work through this transition, and while productivity and potential output may eventually improve, this process will take years rather than mere quarters,” Macklem stated. He acknowledged that the transition could either accelerate if trade uncertainties diminish and businesses invest in new technologies, or it could become more painful should trade relations deteriorate or unexpected shocks occur.
A Cautious Approach to Monetary Policy
In his speech, Macklem adopted a hawkish stance regarding monetary policy, asserting that the Bank of Canada’s role in navigating these changes is limited. He warned against the dangers of misinterpreting economic signals and the potential risks associated with reducing interest rates too drastically.
Last week, the central bank maintained its benchmark interest rate at 2.25 per cent for the second consecutive time, indicating a willingness to keep rates steady unless significant economic surprises arise. The prevailing sentiment in financial markets suggests that the Bank of Canada will likely hold its position through 2026, a notion Macklem reinforced in his address.
“We must be careful not to misdiagnose economic weakness,” he remarked. “Monetary policy should not attempt to compensate for lost supply. Lowering interest rates in response to weak economic activity could lead to future inflation, especially if that weakness stems from diminished productive capacity rather than a cyclical downturn in demand.”
Economic Outlook Remains Cloudy
The outlook for Canada’s economy remains uncertain. Although the country has demonstrated more resilience than anticipated over the past year, challenges persist. Exports have plummeted, unemployment remains high, and businesses are deferring investment and hiring decisions. Recent data from Statistics Canada indicated that Canada’s real GDP stagnated in November and may have slightly contracted in the fourth quarter.
Looking forward, the Bank of Canada forecasts a muted GDP growth rate of 1.1 per cent in 2026 and 1.5 per cent in 2027, hindered by ongoing trade uncertainties and slow population growth. “Some of this softness reflects cyclical weakness while other aspects stem from structural changes,” Macklem explained. “Our baseline forecast suggests that while the impacts of trade shocks will gradually lessen, the potential output trajectory will be lower due to heightened trade friction and demographic shifts.”
Call to Action for Canadian Stakeholders
While largely diagnostic in nature, Macklem’s address also served as a rallying cry for action. He highlighted the undeniable structural forces at play, urging Canadians—households, businesses, and governments alike—to respond proactively to the challenges posed by U.S. tariffs, AI disruptions, and demographic changes.
“We have a choice: we can either succumb to the adverse effects of these external pressures, or we can embrace the structural changes required to enhance our internal market, diversify trade, adopt new technologies, and boost productivity,” he stated decisively.
Why it Matters
Macklem’s insights underscore a defining moment for Canada’s economy, one that requires collective resilience and adaptability. As the nation grapples with formidable challenges, the way forward hinges on its ability to respond strategically to these structural changes. The decisions made today will shape Canada’s economic landscape for years to come, influencing prosperity and stability in an increasingly complex global environment.
