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.
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