Canada’s central bank just told business leaders to prepare for economic pain that will outlast most of them. Bank of Canada (BoC) Governor Tiff Macklem declared the country’s old economy dead last Wednesday in Toronto, warning of “painful” and permanent restructuring that will take decades. He’s advocating for big gambles he admits may not work, asking households to pay higher prices for a payoff they likely won’t live to see.
Canadian Economic Downturn Structural, Not Cyclical
The BoC delivered an unusually political message this week: The country’s downturn isn’t cyclical, but structural. Cyclical issues are related to the business cycle, rising and falling with the natural booms and busts we’ve all come to love and hate. Structural changes are permanent and require drastic changes for the economy to operate. The Governor attributes this shift to three forces: slowing population growth, a breakdown in US trade relations, and artificial intelligence.
“The impact of these forces on the Canadian economy will not be a temporary cyclical fluctuation. These are deep structural changes…” BoC Governor Macklem.
Canada’s Era of Population-Driven Growth Is Over
The country’s era of population-driven economic growth is over, and they aren’t just referencing recent immigration blunders. The Governor explains the labour force grew an average of 1.5% annually for the past 20 years, but the BoC sees it “hardly growing at all over the next few years.”
BoC Declares US Relations Over, Pitches “Painful” Restructuring
Compounding those pressures is the end of Canada’s economy as we know it. “Canada is at a crossroads. The era of rules-based open trade with the United States is over,” warns the Governor. He doesn’t just call for an end to the economic model the country has been using since 1989, but bluntly states it’s over. No room for diplomacy, nor is this an issue that will pass with a new administration. A dramatic restructuring of supply chains and sourcing to non-US countries is the only option.
“Canadian businesses are looking for new suppliers and new markets. This restructuring… will take some time,” explains Governor Macklem. He warns that this transition will be disruptive and cost households more, and businesses that don’t adapt risk becoming obsolete.
AI Structural Change To Improve Productivity, Maybe
The Governor positions the structural changes from AI as a potential Hail Mary, offsetting the others. “We expect efficiencies brought by AI will ultimately boost productivity,” he explains. Further adding, “…the rise of AI has the potential to put the economy on a higher path and raise our standard of living.” Fueling his optimism is a comparison to the internet and a 90s-style transition.
BoC Advocates For Structural Changes, Warns It May Not Work
The Governor suggests this isn’t a choice, but he also hedges by explaining it’s not a clear win. “The Canadian economy could fail to restructure. If that happens, productivity and GDP growth do not recover…,” he explains.
His final warning suggests productivity won’t rebound without a dramatic pivot. Incomes will stagnate. “Affordability worsens.” He warns we’re entering a period of painful adjustment, whether we want to or not. Yeesh, and people say we’re Negative Nellies.
The Governor is correct on a number of issues, but left some glaring omissions around risk. It appears he’s primarily trying to support a political narrative while using fear as a policy tool.
BoC Productivity Push Conflicts With Population Slowdown Warning
The Governor attributes a growing population as a source of pain for the economy, but misses a few things. First, the slow growth is presented as a two-year freeze that ends this year. It followed a record high, with the impact on the 2074 population estimates amounting to the equivalent of a rounding error.
The math on the Governor’s population growth claim is more disturbing than he realizes. Labour force growth of 1.5% annually, with ~2% GDP growth, means roughly 75% of Canada’s economic “growth” was simply adding more people, not productivity. The quality of life erosion wasn’t a recent mistake; it was the model.
BoC Declares End of US Relationship, But Reality Doesn’t Match
Diversification is always smart, but it shouldn’t be a synonym for delusion. Our relationship after a U.S.-led trade war has seen better days, but we don’t just trade for fun. Our economies are highly integrated to an extent that would surprise the vast majority on both sides of the border.
A cross-border energy grid and integrated defence agreement make separation nearly impossible. Under Canada’s Defence Production Sharing Agreement (DPSA), US military contractors are considered domestic for sourcing. South of the border, the US Defence Production Act (Title III) grants Canadian firms the same privileges. If the actual end of the rule-based order were here, both countries would have a lot more to worry about.
Recent US polling also indicates the trade relationship will play a major role in the country’s midterms, presenting a threat to the American President’s powers. Losing the midterms would effectively turn the US administration into a lame duck, killing the very trade war Macklem claims is permanent.
Those are just two of the reasons the end of that relationship might not be over, despite the best efforts of policymakers to get taxpayers to fund a global re-wiring for a handful of large companies.
The AI Gamble: BoC Advocates For Big Bets On… They Aren’t Sure
AI is a guaranteed structural change, but the Governor seems less confident about his AI benefits than he is about declaring the need to overhaul the country’s sourcing. The optimism is based on vibes, not real data. The BoC admits productivity gains may take “a while” to materialize. Meanwhile, in the same speech, the Governor attributes elevated youth unemployment to AI eliminating entry-level jobs.
His optimism relies almost entirely on the internet analogy of things just working out, before flip-flopping on the impact on jobs. He suggests no material impact on hiring, while simultaneously attributing the elevated youth unemployment rate to adoption.
“So far, we are not seeing much impact of AI in the labour market either,” explains the Governor. Later adding, “the flip side is we may be seeing some early evidence that AI is reducing the number of entry-level jobs in some occupations.”
There’s also the small matter of failing to directly acknowledge AI’s productivity growth isn’t net positive in the short-term. There will be a period where AI’s productivity accelerates the productivity of some, while replacing the jobs of others. In our interview with former BoC Governor Stephen Poloz, he suggests that up to 30% of workers will require retraining due to this disruption.
BoC Warns Canadian Economy Is In Crisis, Upgrades GDP Forecast
The crisis narrative becomes even more suspect when you consider the numbers. The BoC speech is a case study in why central banks should avoid politics. Governor Macklem paints a picture of a crisis and proclaims the old economy dead—yet the BoC upgraded its recent quarterly forecast between October and January, and is forecasting stable inflation at 2% for years ahead. The mismatch between narrative and reality suggests fear is being used as a monetary policy tool.
The BoC is stuck trying to stimulate business investment while defending the inflation target. Lower rates have failed to stimulate investment, while the central bank’s preferred rate of inflation remains sticky on the high end of its target. They’ve already tried dismissing their own preferred inflation measure, claiming inflation isn’t a number, but more of a feeling. Nice try.
Fear as a monetary policy tool is counterproductive. The vast majority of Canadians are employed at small and medium businesses (SMBs), despite the framing of policymakers. They aren’t politically connected mega firms that can ask for a taxpayer bailout when things go wrong. They need to be comfortable to make major investments, not told they need to make large bets on overhauling their supply chain overseas and replacing employees with AI.
But don’t take my word, the BoC understands this. “Uncertainty is still causing firms to hold off on new investment plans and to conservatively manage their finances, among other actions,” explains the BoC in its Business Outlook Survey. Am I the only one who reads these things?
When The BoC Gambles Their Friends Win & You Lose
The Governor’s plan has another problem: you won’t live to see it work, as it hinges on a currency shift. Canada trades in US dollars—whether buying from China, selling lumber to Europe, or importing Mexican tortillas. Almost every country does, as the US dollar is the global reserve currency used to price and settle nearly all international trade.
Historically, strong cross-border trade with the US has helped keep Canadian inflation and interest rates low. Restructuring away from that means higher costs for everything priced in dollars—which is virtually everything—from BC lumber to Alberta oil to Manitoba wheat to Quebec dairy. The only way this changes is if the US loses its reserve currency status.
That kind of shift takes generations—and historically only happens after devastating wars. The British pound held reserve status for roughly 80 years before the US dollar took over. Even optimistic estimates suggest 30 to 50 years—and that’s assuming the US actually collapses as the global economic anchor.
Let that sink in. If you’re 35 years old today, you’ll be ~85 years old when that pays off. You’ll work your entire career paying structurally higher prices on everything. You’ll retire into that system. You might die before Canada sees the benefit of this restructuring. That’s a pretty big gamble because the US made a 4-year administration fumble that may change its policies on US-Canada trade this year.
The current BoC administration has had limited success doing its job, it shouldn’t take on a side-hustle lobbying for large, disruptive political gambles. Small businesses are supposed to make massive, irreversible bets on restructuring supply chains and replacing workers with AI-driven productivity gains. The BoC’s own Survey shows uncertainty is already causing firms to hold off on investment, and Macklem just added to that uncertainty.
The old economy is dead, but the Governor hasn’t explained how the new one keeps Canadians fed, housed, and employed in the meantime. That’s not negativity, it’s the timeline he’s selling.
Back in the day I worked to stop or at least lessen the focus on free trade with the US. Our economy has been hollowed out over the last 40 years and now the chickens have come home to roost. The elite will not pay the price.
Free trade isn’t the problem, the tariffs are.
Canada’s boom was due to the growth in disposable income, but now the generation that benefitted is telling the next generation to make sacrifices now that they’re done.
Tariffs are not the problem, it’s the concept of borders, taxes, and so on. Consider, for 100y, the auto industry in the rust belt was a model for advancement and productivity. From assembly lines to integrated supply chains to specialized manufacturing of components and materials between canada and the usa.
Even after the deterioration of that model in the 70s, we allowed offshore manufacturers to come in and build plants to assemble cars in that area.
Tariffs are a natural consequence of globalization. Just as ford invented modern manufacturing, the 1990s saw capital flight to avoid taxation, unions, high costs. Moving production to Korea, China, India didn’t mean better products or even more efficient supply chains, it was an arbitrage. Because of structural problems in the northern usa and canada, despite less infrastructure, poor education, high shipping costs, environmental degradation, labor abuse, it made profits for the capitalist class.
The problem is if investment leaves the west, and goes to the east, it’s only a matter of time before we are the poor cousins who can’t compete. Consider, we invested a few trillion in China, and Taiwan. Now they not only completely control semiconductor manufacturing, design and therefore our entire information economy, but even if we wanted to, we don’t have the expertise or capitL to compete. So we threaten China over invading taiwan?
So Tariffs are popular to ‘protect’ local industry. The problem is, if, as noted in the article, you have neither the capital, infrastructure or skills to compete, then what? It’s just another tax like those on gas and cigarettes? While such consumption taxes may have worked in the 80s, 90s, they only have an impact on the margin (relative change in price), and tend to normalize consumption shortly after introduction.
As noted, the entire post covid geo political situation has nothing to do with freedom, democracy, etc. It’s about the west trying to cling to their monetary hegemony over trade. As noted, the usd is the global reserve currency. So everyone needs to keep reserves in usd to trade. This is likely 45% of the us, uk, and other western countries gdp or more. The problem is when they exclude countries like russia, Iran, Venezuela, Cuba, from the usd banking system, these countries band together to trade in a parallel system.
This is also part of the imf, world Bank, development programs, and so on set up post ww2. China has basically replaced the world Bank and other western agencies by redeploying profits from selling g us stuff to invest in Africa, Latin America, Asia, even canada. The danger is, when the move to end the usd/euro/ pound hegemony comes, if the developing world is dependant not on the west, but the Brics countries, and move to the yuan will be able to exclude the west, just as they excluded russia.
So maybe that takes 20, 30, 50y, but 50y is a very long time. The use of military to try to impose this on russia was a really dumb move, and that is why no one with any knowledge thinks taking russias central bank reserves to give to ukraine is a good idea. If they do that, China, will say, hey if you cross the west they will bankrupt your country, or fly in and arrest the leaders on trumped up charges. So a pretty strong argument for the yuan to replace the usd.
In terms of canada, trump could be, as noted, a lame duck in 8mos. Why on earth would anyone other than liberal backed cartels in central canada support anything carney and this guy are saying. Even if we could somehow get more trade to Europe or Asia before 2028, which there is no viable plan to do, the costs would be staggering, and normalized trade would make it a terrible bet. The reality is, as much as Canada’s cartels would like you to believe that they are in it for canada, this entire campaign is 100% political, 0% economics. Canada remains the main supplier to the usa of aluminum, oil, gas, petroleum products, fertilizer, wood, minerals, etc. Just as we can’t move away from them, offshore oil and gas, mining, whatever is limited severely by infrastructure. Canada supplies almost all of the enery to the central, easternaand west coast of the usa. It was easier for them to build lng plants on the gulf than get gas to Chicago or Seattle.
The reality is canada has always had much of our e onomy protected from trade by tariffs, regulations, and so on. Those people are scared to death of free trade. So you have this wrong…
The point of this article is that borders, tariffs, nationalism are political creations that hinder productivity. Canada 8s not going to make or groww everything we need, trade predates human civilization. Why should a dairy farm in Manitoba not compete with one in minnesota? Why can’t I etransfer money to my brother in LA? These barriers are created to divert productive activity to unproductive organizations like banks and govt.
This bizarre argument ent that 18 mos of trump means we have to avoid the usa forever is not only dumb, it is destroying our economy.
The key question should be if a non liberal was pm, would this have happened? Apparently, the paranoid delusions sold to us about trump to elect a guy who spent almost all of his private career as a banker out of canada, sends his own kids to a us university, but has become a maple leaf zealot?
Despite whatever these people in Ottawa a d Toronto are saying, not much has changed in trade since Jan 2025. So despite the dire predictions of carney and co., the current econo is mess is 100% the fault of his govt, not trump. Consider, carney made a mess in the uk, using easy money policies to transfer wealth from the middle to the rich. This is exactly where canada is. S8nce us banks are seeing Canada’s uner high banking margins as a trade item, 5he gloves are off.
However the negative m9mentum in credit for canada may see our ‘safe’ banks needing a us bailout
Tiffany is hands down the worst Governor in a very long time, and that includes the one that took us off the gold standard.
Poloz seems like an angel in contrast.
Looking forward to Parliament summoning you to explain all the ways the BoC is lying, again.
It’s hard for the average schmuck we elect to really understand just because Tiff is smart enough to get the role doesn’t mean he won’t lie his ash off.
I think that door shut when Carney unfollowed him on X for not pretending there was a laundering problem… shortly ahead of TD getting hit with fines for the exact problem he called out.
Sad that we as a country considers real insights as problematic in favor of continuing the laundering issue.
I work in AI and this is hilarious. People have a really hard time grasping change on an exponential timeline.
You think humans are having a hard time adjusting to social media? Consider that ChatGPT is just over 3 years old, and went from a pseudo search engine to aiding in rocket ship designs and financial analysis.
We no doubt will learn how to adapt, but it’s not going to be fast. Steven understands this, he was my advisor for my machine learning capstone at UBC 5 years ago. I don’t know if you read these, but if you do, you really should have leaned into what you told us on day one. A reality check that was depressing, until we put it together and realize we need to hustle before getting left behind.
Wow, looks like we’re in for a rough ride. Not sure how my family will manage with higher prices on everything. Guess it’s time to tighten the budget even more…
I love how Stephen Punwasi makes economics entertaining and understandable..
I’ll be ok. I’m going where the streets are paved with gold.. 👍
Streets are paved with gold? Where’s that?
also, yes. Steven is one of the good guys. I don’t like his takes on crude, but that doesn’t mean he’s wrong. Time will tell. I know he ran for mayor as an awareness campaign, but it’s crazy to me that someone smart wanted to run for government, and the NDP nutbags sleeping with developers wanted to ruin his life. Hope they like the exodus because now they’re sitting on hundreds of millions in losses taxpayers are picking up now.
I’m too old to move, but if I were young I would in a flash. I love Canada, and always will, but this whole political economy isn’t constructive to someone trying to get anywhere in this economy.
e.g. the Carney-Macklem duo wants the public to not do business with the US, while Carney’s company literally moved to the recently.
Consider that trade volumes with the usa have arely moved since last February. The subsidized and inefficient manufacturing in central canada is dying, but it’s dying in the rust belt too. Mexico is making more and more cars, because of low cost of living, and easy access to us population centers.
Consider the usa has seen massive population growth in Texas, Georgia, Tennessee, Carolinas, Arizona, Florida, Kentucky, etc. Houston, dfw, Atlanta, are growing just as fast as Toronto, and not because of fake college scams importing min wage workers.
The major northern cities of the usa are all facing population drops since 2000, but we thought Toronto can be 10M? Forget about the housing mess, the other issue is the stated, Ottawa, montreal don’t produce much of anything anyone who isn’t forced to buy wants.
So just as population is shifting south in the usa, it’s shifting west in canada. The main point of trudeau, carney, maple is they don’t want that. They are protecting the established cartels in banking, transportation and distribution, telecom, media, grocery, manufacturing, insurance, and food production from competition. Every free trade deal since the 1970s when Trudeau Sr enacted much of this, has been about Canada’s cartels and tariffs. So as much as carney wants to tell you about new markets, without ending these cartels, it won’t happen anywhere.
For the places that produce real gdp, western and northern canada, these cartels are a major drain on their economies. For example, since 2007, more than 1trillion was used to subsidize auto and parts manufacturing in central canada. This is 11% of our exports? At the same time not a cent went to fertilizer, new gas and oil tech (where canada was once a global leader in both). So if I bought tortellini at 200/sh and it’s now 40, I should dump all my money into it now?
This trade war was always a liberal creation, and as noted, the boc has lost any credibility by jumping onto that fraudulent claim.
Try the magic math fiction for condo maintenance which the cmhc conveniently does not have an accurate record especially for serial special assessments
So we are given a reserve fund study that recommends theee percent hike from now until eternity or atleast until the next reserve fund study in three years
Our board and mgt did an intense tap dance regarding the recent special assessment one of a series we keep getting every couple of year now re tarrifs and huge construction cost pressures far exceeding the three percent based on the latest reserve fund study
So then how come all the prior special assessments of the reserve fund study is reliable and will the three percent recommendation for reserve funding hikes prevent any further special assessments given the reveal we had a few weeks earlier on the real cost pressures for building maintenance
Yup I get it that if a building mainly seniors is at best getting two percent on their oas and cpp and what oas isn’t clawed
Back because the f the repeat need to draw down more of their rrifs for those who have them than planned so they don’t face a de facto eviction because these bills are backed by a very forceful automatic liens
So three percent over the next how many years is “only”a gap
Of one percent and the two percent for the oas hike this year etc but that adds up that disparity and then when one recalls the tap dancing at the meeting to introduce the upcoming special assessment and building construction labour cost pressures. My conclusion is the reserve fund study is just a happy fiction
Amy other corporation if faced with the equivalent of a special assessment would be recognized as insolvent especially if it keeps occur g eg like the post office issue but nope as far as government
Bodies are concerned this is just a private debt matter that owners are on the hook for mitigating or else
Amd the cmhc doesn’t even gather data on special assessments so while we have an acknowledged housing affordability apparently this isn’t happening in condoland amd of
Course owners and corporations keep
Being excluded from the cost mitigations say for eco retrofits housing higher up the property ladder could and can harvest and hand out to social housing once someone realizes oops we can exclude that group
So I would suggest these data desserts are one reason the bank of Canada is also being “ undone “ right before our eyes
The condo mess is quite the con game of smoke and mirrors and pass the buck and it is hurting many including those who remain of the middle class who were fools to
Buy a condo for their entry or their final days
Can’t wait for the auditor to explain how the three percent hikes per the reserve fund study will prevent but another special assessment. Oops except the auditor is really only there to confirm money contributed was sent to pay bills and not bacon’s with
What stands out here is not the pessimism itself, but the shift in framing from the Bank of Canada. The message is no longer about cyclical slowdown, but about structural limits.
If growth constraints are structural rather than temporary, then monetary easing alone cannot restore momentum. Productivity, labour participation, capital investment, and housing supply all become binding constraints rather than secondary variables.
Housing policy plays a larger role in this than is often acknowledged. Restrictions introduced to cool speculative demand also reduce labour mobility, delay household formation, and discourage capital deployment at precisely the moment the economy needs flexibility. When affordability pressures, rigid mortgage qualification, and policy uncertainty intersect with weaker hiring, the result is economic friction rather than stabilization.
Demographics compound this. Slower population growth, a rising share of seniors, and softer per-capita outcomes change how households and businesses behave. Investment becomes cautious, migration becomes selective, and capital increasingly looks south when returns and policy clarity diverge.
This helps explain the disconnect between headline GDP growth and lived economic experience. Data from Statistics Canada already show hiring weakness emerging beneath population-supported growth.
The message here isn’t collapse, but constraint. Canada is entering a period where growth depends less on stimulus and more on coordination across labour, housing, productivity, and capital policy. Adjustment periods like this tend to be long, uneven, and highly sensitive to timing.
Anyone investing in Canadian real estate needs their heads examined. Is there a brain there?
There are over 143 million USA homes in all price ranges and styles across the USA – MILLIONS OF WHICH COST LESS THAN 50K
ENJOY POVERTY AS YOUR CONDO BECOMES ALMOST WORTHLESS ACROSS CANADA
WORLD INVESTORS HAVE DUMPED CANADA AND LEFT FOR THEUSA BAGHOLDERS
My guess is that BoC intends to cut interest rates (way below inflation) and likely to launch another QE round(s), they know these policy decisions will be very unpopular, so they need to spread the narrative of coming economic collapse in order to con people into accepting their awful policy decisions.
It’s time we put an end to this endless parade of career politicians, business men, and bankers running the govt. The fruits of their labour are always rotten
I love that Canada is finally turning into the shi*hole country it has filled itself with. Canada is doomed. Keep overregulating and overtaxing. It’s working great.
You mean you feel vindicated? Because I knew it was going to happen, but I definitely don’t feel good about being right on this one.
I believe it is time for the Governor of the Bank of Canada and the current leadership team to step down. After twenty years in these roles, they failed to anticipate the current economic challenges.
While many Canadians have capital, there is a significant lack of trust in the market to invest. Furthermore, I believe interest rates should be lowered, as current decisions appear to be based on inaccurate data. It is time for a new, business-friendly team to take over and manage the Canadian economy more effectively.
50 years ago – 1976, I was 27. Divorce was 21 years away. Second and excellent marriage was 40 years away. The seed of my ultimate career choice was next year. There were no cell phones, internet, email. These were 20 years away. Trickledown economics and the destruction of the middle class was 4 years away. Iran had a Shah. The Soviet Union was scaring the World and would do so for another 13 years. South Africa had apartheid, Brasil was a dictatorship. China was poor. Cars had V8 engines and round headlights. Padded dashboards were a new thing. Cancer was a 1/10 opportunity, not 1/2. England still thought they had an Empire. There is so much going to happen in the next 25 and 50 years, it is near ridiculous to say these three things are the future’s defining events. Ya ain’t seen nothin’ yet! Just roll with it. We always have (had to).
I always appreciate the views on this website, but I do not believe the analysis in this article is correct.
It seems to me that the main assumption is “hide your head in the ground for 8 months” and everything will be fine.
Trump is only a symptom of the reorganization that the US is undergoing, not its cause. After him, no president (at least those wanting to get re-elected *cough *cough* all of them!) will ever let go of the tools he is employing (e.g., coercive tools, tarifs), even if they are ‘nicer’ about it, less idiotic and offering niceties to Canadians – President Biden kept most of Trump 1 policies and even expanded on them.
While I agree that we will always be trading partners due to geography, and that the costs of this change are immense and unlikely to pay off during our lifetimes, it does not change the fact that hedging against an adversarial US is something we must do, at any cost.
I, for one, am fully willing to pay any price rather than live in the infamy of our generation for not acting in the face of this challenge when it was required.
Not how I read it. I read it as they’re amplifying pain. The US House rejecting tariffs as a sign they’ll create a lame duck president is pretty solid proof that the US thinks this is dumb.
What the vast majority of Canadians don’t understands is, in a democracy, elections aren’t winner takes all and gets to reign as king for 4 years. Midterms are a check on that power, as a way of pulling back on buyer’s remorse.
ALL OF CANADA IS A REAL ESTATE DUMPSTER FIRE
NEW LUXURY USA HOUSES COST 400K OR LESS