Canada Faces Economic Crossroads Amid Structural Shifts

The Canadian economy is entering a period of rapid transformation, driven by rising US protectionism, the emergence of artificial intelligence, and slower population growth. This wave of structural change stands apart from normal economic fluctuations, posing both immediate challenges and long-term opportunities for businesses, workers, and policymakers.

In a recent policy address, the economic outlook for 2026-2027 was explained as one of modest growth, with the Bank of Canada holding its policy rate at 2.25%. Heightened global and domestic uncertainty, especially regarding US trade policy, shadow this forecast. Canadian exports have fallen sharply as a result of new US tariffs, forcing companies to search for alternative markets and suppliers. While exports to the US decline, those to other countries are rising, though not fast enough to offset trade losses. Business investment remains weak amid this uncertainty but is expected to strengthen as firms adapt and as government infrastructure initiatives take hold. With household spending supported by prior interest rate cuts, GDP growth is anticipated to average a subdued 1.25% over the next two years.

The impact of AI adoption is another crucial force. While still at an early stage—with only a minority of businesses reporting significant AI use—its influence is expected to grow. The most visible effects so far appear in sectoral labor markets: demand for AI skills is rising, but there are early signs that entry-level job opportunities, especially for youth, are shrinking in some professions as routine tasks become automated. Yet, AI is also seen as a potential source of future productivity gains and higher wages, echoing the broader gains brought by past technological revolutions like the internet.

Monetary policy faces limits when confronting these changes. The Bank of Canada’s role, as articulated, is to maintain price stability while supporting the economy through this structural transition. Policymakers are wary of misdiagnosing structural shifts as cyclical downturns—cutting rates too much amid long-term economic constraints could stoke inflation or delay needed adjustments. Instead, the Bank is investing in richer sectoral analysis and scenario planning to better distinguish between temporary slowdowns and lasting changes, ensuring appropriate policy responses as the new economic landscape forms.

Canada’s path forward will be determined by how nimbly businesses, workers, and governments respond to the fading era of open US trade, technological disruption, and demographic headwinds. Successfully embracing these changes—diversifying trade, harnessing AI, and boosting productivity—will be essential to maintaining prosperity. The significance of these developments cannot be understated: how Canada adapts today will set the course for its economic vitality in the years to come.