Canada’s economy faces a prolonged and potentially painful adjustment as it grapples with U.S. tariffs, slowing population growth and the gradual impact of artificial intelligence, Bank of Canada Governor Tiff Macklem said on Thursday.
Speaking in Toronto, Macklem said the restructuring needed to adapt to these structural shifts would take years rather than quarters, and warned that economic growth would remain modest during the transition.
“As the Canadian economy works through this transition, growth will be modest,” he said, adding that productivity and potential output would eventually improve, but only over time. The process, he cautioned, could prove more disruptive if trade conditions deteriorate further or if new shocks hit the economy.
The comments come after the central bank last week held its key policy rate at 2.25% for a second consecutive meeting, signalling that rates would remain unchanged as long as economic developments broadly matched its forecasts.
Macklem said uncertainty around the outlook was unusually high, making it difficult for policymakers to distinguish between cyclical weakness and deeper structural change.
He warned that misreading the source of economic weakness could lead to policy errors. Cutting interest rates in response to structurally driven weakness could fuel inflation if productive capacity had declined, while overstimulating demand could delay necessary economic adjustments.
The central bank’s projections suggest Canada’s labour force will see little growth in the coming years, though Macklem said he was not expecting unemployment to rise materially.
On artificial intelligence, he said the technology had the potential to lift productivity and reshape the labour market, but adoption by firms remained limited. As a result, its economic impact was likely to take time to materialise.
Macklem urged policymakers and businesses to adapt proactively to the changing environment, stressing that Canada could not afford to fail in managing the transition.
