Bank of Canada Governor Warns Economy at Crossroads, Urges AI and Trade Action
Bank of Canada Governor Tiff Macklem has issued a stark warning about Canada's economic future, stating that the nation stands at a critical juncture. In a speech delivered at the Empire Club in Toronto, Macklem emphasized that structural changes driven by trade uncertainties and technological advancements could have painful, long-term consequences for productivity and GDP growth if not properly addressed.
Structural Changes Present Both Risk and Opportunity
Macklem outlined two potential paths for Canada's economic transition. 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, he stated. However, he cautioned that it could also be more painful than we'd like — particularly if the trade situation darkens or other shocks disrupt the economy.
The central bank governor stressed that how Canadian households, businesses and governments respond to these structural breaks will determine our future prosperity. 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 asserted.
Current Progress Insufficient, Adoption Remains Slow
According to Bank of Canada research and data, while businesses have begun adjusting to the new economic reality, significant challenges remain:
- Trade diversification efforts are just getting underway
- AI adoption in Canada has been slow to gain traction
- The small but growing share of exporters expanding beyond U.S. markets remains largely limited to existing clients
- Businesses have not found many new international clients yet
Significant adoption of AI to produce or deliver goods and services remains low, Macklem noted, adding that there's a possibility AI could whittle away at entry-level jobs in the interim.
Complications for Monetary Policy and Economic Management
The structural changes in the economy present unique challenges for the Bank of Canada's monetary policy decisions. Macklem explained that these changes require deeper sector-by-sector analysis to separate structural factors from cyclical ones, all while maintaining inflation around the two percent target.
We have to be careful not to misdiagnose economic weakness, Macklem warned. 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.
Dire Consequences of Inaction
Macklem painted a concerning picture of what could happen if Canada fails to adequately restructure its economy:
- Productivity and GDP growth would not recover to previous levels
- Canada would become a less attractive destination for investment
- Business competitiveness would decline significantly
- Job and wage growth would remain weak
- Incomes would fail to recover
- Affordability challenges would worsen across the country
That's what we really can't afford, Macklem emphasized. That's why we need to lean into this structural change.
Call to Action for Businesses and Policy Makers
The Bank of Canada governor urged immediate and decisive action from both the private sector and government officials. He specifically called for accelerated efforts in two key areas:
- Ramping up trade diversification beyond traditional U.S. markets
- Increasing adoption and integration of artificial intelligence technologies
Macklem's warning comes as Canada faces additional economic headwinds, including slowing population growth that further complicates the economic picture. The governor's message underscores the urgency for coordinated action to ensure Canada remains competitive in a rapidly changing global economic landscape.
