Bank of Canada
Governor Tiff Macklem said Canada is at a crossroads and warned Thursday that structural changes underway in the economy due to trade uncertainty and new technologies could be painful with long-term impacts on productivity and GDP growth.
“The transition could be faster than we expect, particularly if trade uncertainties ease and businesses move more boldly to invest in new technology, markets and products,” Macklem said in a speech at the Empire Club in Toronto. “But it could also be more painful than we’d like — particularly if the trade situation darkens or other shocks disrupt the economy.”
He urged businesses and policy makers to ramp up trade diversification and
AI adoption
to avoid an outcome where GDP growth does not recover, Canada becomes a less attractive place to invest and affordability worsens.
“How Canadian households, businesses and governments respond to these structural breaks will determine our future prosperity,” he said. “We can be victims of U.S. tariffs and AI disruption, or we can lean into structural change, expand our internal market, diversify our trade, embrace new technology and raise our productivity.”
Macklem said Bank of Canada research and data show that while businesses have started to adjust to the new reality, trade diversification is just getting underway, while AI adoption in Canada has so far been slow. Complicating the picture in Canada is slowing
population growth
.
The small but growing share of exporters that have increased sales to markets outside the United States is largely limited to existing clients, Macklem noted.
“Businesses have not found many new clients just yet. And with so much of our exports going to the United States, the increase in other markets only provides a partial offset,” he said.
Meanwhile, AI adoption looks to be gaining traction, but it’s early days.
“Significant adoption of AI to produce or deliver goods and services remains low,” he said, adding that, in the meantime, there is the possibility it will whittle away at entry-level jobs.
The structural changes in the economy complicate the job of the Bank of Canada, requiring it to do deeper analysis by sector to separate what is structural from what is cyclical, all while ensuring inflation remains around two per cent.
“We have to be careful not to misdiagnose economic weakness,” Macklem said, adding that monetary policy should not try to compensate for lost supply.
“Lowering interest rates in the face of weak economic activity risks stoking future inflation if the weakness is due to lower productive capacity rather than a cyclical downturn in demand. And there is also a risk that overstimulating demand when the problem is structural could delay needed structural change.”
Macklem warned that if the Canadian economy fails to restructure, productivity and GDP growth will not recover and Canada will become a less attractive place to invest. In this dire scenario, he said businesses will become less competitive, job and wage growth will be weak, incomes won’t recover, and affordability will worsen.
“That’s what we really can’t afford,” he said. “That’s why we need to lean into this structural change.”
Macklem said the economic restructuring he envisions is going to take years and although it has been less than a year since the protectionist policies of the United States became clear through tariffs, businesses can’t afford to wait to respond.
“Our trade relationship with the United States is fundamentally fractured. Population growth is lower. AI is coming,” he said after his speech. “They’re not temporary, these changes. They’re not they’re not going to go away.
He added that Canadian companies have been slower to adopt AI than their U.S. counterparts, which have embraced the new technology without knowing how quickly it will transform our lives and economies.
“Those things are uncertain, but the direction of travel is clear,” he said. “What that means for businesses is this isn’t something they can just wait it out. This isn’t about enduring it. It’s got to be about embracing it.”
The Bank of Canada governor said he sees the central bank’s role in the economic transformation as a supporting one, adding that monetary policy can’t restore lost efficiency caused by increased trade friction.
“Monetary policy isn’t going to have much effect on the adoption of AI, either, and monetary policy certainly can’t influence fertility or immigration rates,” Macklem said.
What the Bank of Canada can do to help the economy through this restructuring is to aim to keep inflation low and stable and to respond to restrained demand from spillovers and cyclical weakness as it traditionally has, he said.
At the same time, he urged businesses and governments to embrace the moment.
“Structural change needs to be a catalyst to move forward, to invest in new technology, to develop new markets,” he said.
“From a policy perspective, it needs to be a catalyst to opening up our internal market, reducing interprovincial barriers to trade…(and) streamlining regulatory approval so businesses can get moving on investment more quickly.”
• Email: bshecter@postmedia.com
Fate of Canadian economy will depend on how we adapt to structural changes, Macklem says
2026-02-05 19:05:25
