Canada faces lasting change from trade, technology and demographics, reshaping growth prospects and policy limits, governor says
The Canadian economy is moving through a period of deep structural change that will have long-term consequences for growth, inflation and investment decisions.
In a wide-ranging speech delivered to the Empire Club of Canada, Bank of Canada Governor Tiff Macklem argued that the forces at work go far beyond a typical economic slowdown and signal a fundamental shift in how the economy functions, stating that “Canada is at a crossroads.”
Macklem emphasized that the challenges confronting the economy are structural rather than cyclical. Unlike temporary fluctuations tied to interest rates or consumer demand, structural change alters the underlying level and composition of economic activity. These shifts can permanently reshape industries, employment patterns and capital allocation, making them particularly important for long-term financial planning.
He pointed to three forces driving this transition.
First, rising trade protectionism in the United States has introduced uncertainty into Canada’s most important trading relationship, weakening a model built on decades of deep integration. Firms are now reassessing supply chains and market exposure, a process that takes time and can dampen near-term growth.
Second, rapid advances in artificial intelligence are creating both opportunity and risk. While AI has the potential to lift productivity, Macklem warned that it could also lead to misallocated investment and significant labour disruption if adoption outpaces effective adjustment.
Third, demographic trends are reducing the economy’s capacity to grow. Slower labour-force expansion means Canada’s potential output is increasing at a more modest pace, narrowing the margin for non-inflationary growth.
Macklem noted that structural change “permanently changes the level or composition of economic activity,” making it harder for policymakers and businesses to rely on historical relationships when making decisions. These adjustments can suppress activity in some sectors even as they eventually support productivity gains elsewhere.
From a policy perspective, the governor cautioned against using monetary policy to offset structural transitions. Interest rate cuts, he said, are not an appropriate tool to smooth these shifts and could risk reigniting inflation if the economy’s underlying capacity has changed.
The message is that interest rates may stay higher for longer not because demand is excessive, but because the economy itself is evolving. Understanding the difference matters for asset allocation, risk assessment and long-term client strategy.
Macklem concluded that recognizing the scale and permanence of these changes is essential for navigating the years ahead, as Canada adapts to a new economic landscape shaped by trade realignment, technological change and demographic reality.
