Introduction
Good afternoon. It’s a pleasure to be back at the Empire Club to deliver my first speech of the year. And what a year it’s shaping up to be.
Last week, the Bank of Canada held its policy rate at 2¼%—and we had two key messages.
First, our economic outlook has not changed much since last fall, but uncertainty around our forecast has increased. We continue to expect the Canadian economy to grow modestly and inflation to stay close to the 2% target. But geopolitical risks are heightened, and US trade policy remains unpredictable.
Second, the Canadian economy is adjusting to US protectionism. Canadian businesses are looking for new suppliers and new markets. This restructuring, which includes shifting our trade and integrating our internal market, will take some time. But in time, it will strengthen our economy.
Today, I want to focus on this second theme—structural change and what it means for the Canadian economy.
Canada is at a crossroads. The era of rules-based open trade with the United States is over, the potential of artificial intelligence (AI) looms large, and our demographics are shifting. The impact of these forces on the Canadian economy will not be a temporary cyclical fluctuation. These are deep structural changes that are transforming the economic landscape. And how Canada responds—which road we take—will define our economic future.
The Bank of Canada needs to understand the economic implications of structural change to deliver on our mandate—low and stable inflation. Governments need to understand it to direct public investment, encourage private investment and use industrial policy to capitalize on our economic strengths. Businesses need to understand it to develop new markets and products, invest in productivity-enhancing technology and help their workers gain skills for the future. And Canadians need to understand it so they can see the opportunity, while managing what could be difficult adjustments along the way.
That’s a lot to navigate in a short speech, so let me break it down into three manageable questions.
First, what do we expect for the economy this year and next—what does structural change mean for growth, jobs and inflation?
Second, where do we see adjustments already happening, and what could be in store in the years ahead?
And finally, what are the monetary policy implications? This last question is important because monetary policy should not try to mitigate structural change. Our role is to preserve price stability while supporting the economy through the upheaval. That’s easy to say, but hard to do in the moment.
What is structural change?
Before I tackle these three big questions, I want to start by defining what we mean by structural change.
Things are always changing in the economy. Oil prices, the stock market and exchange rates go up and down. Consumer and business sentiment shifts. And the strength of the global economy ebbs and flows. But these changes are not structural change.
Structural change is bigger and broader—and it’s not temporary. It permanently changes the level or composition of economic activity. It alters what and how much the Canadian economy can produce at full capacity without causing inflation. Structural change is a journey. It’s the transition between one steady state and the next—between Canada’s old economy and the new one taking shape.
In truth, the economy is always adjusting to structural forces like new technology. Most of the time structural change is gradual and relatively smooth. It’s operating in the background.
But sometimes structural change is more prominent because the pace of change is unusually rapid. This can happen because of a fundamental policy shift—such as the Canada-US Free Trade Agreement in 1989—or the dawn of a new transformative technology like the internet in the 1990s.
Today is one of those times of rapid change—we are facing a convergence of structural breaks. Advances in AI have dramatically broadened its application, the United States has swerved to protectionism, and our population growth has declined.
Structural change can be disruptive, rendering some investments obsolete and displacing some workers. And spillovers from sectors that are restructuring can create cyclical weakness in other parts of the economy. Structural change can also increase uncertainty because it’s hard to know how transformative it will be. When the internet emerged in the 1990s, we didn’t know just how valuable the new technology would be or which investments would pay off. Even as the internet proved to be an enormously powerful new technology, the dot-com bust of 2000 was a painful reminder that many new companies could fail.
Like the internet, AI is a transformative technology, and its rise has sparked concerns about over-investment and over-valuation as well as fears of job destruction. But just as the internet enabled new services and business models that boosted productivity, the rise of AI has the potential to put the economy on a higher path and raise our standard of living.
While AI is building on past innovation, the US swerve to protectionism is reversing gains from trade. When Canada embarked on free trade with the United States in 1989, it did bring some pain in the short term—competition can be tough. But, in time, a bigger market and new competition brought innovation and investment, increasing productivity and growth and lowering inflation. Now, new US trade restrictions are reducing efficiency, raising costs and lowering incomes in Canada.
Trend growth in gross domestic product (GDP) is also being pulled down by lower population growth, which reflects both a decline in fertility and lower rates of immigration. That means fewer new consumers and workers in the economy, which lowers our economic potential. The Bank’s population forecast suggests the Canadian labour force will hardly grow at all over the next few years after annual growth of almost 1½% on average for the past 20 years.
Looking back at history makes identifying structural breaks look deceptively easy. But identifying what is happening in real time is challenging because structural change happens at the same time as cyclical changes in demand and supply. That makes it hard for businesses, workers, governments and central banks to know which change is temporary and which is permanent—and hence where to invest and how to set policy. I’ll come back to the policy implications momentarily.
Canada’s economic outlook
But first, let’s consider the first question: what does structural change mean for the economy over the next couple of years?
Last week, the Bank released its quarterly Monetary Policy Report, including our economic outlook for 2026 and 2027.
US tariffs have weakened our economy. Exports are down sharply. And while some export growth is expected to resume this year, exports grow along a lower path (Chart 1).
