OTTAWA, Feb 5 - Bank of Canada Governor Tiff Macklem said the process of reorganizing the Canadian economy to contend with U.S. tariffs, slower population growth and the emergence of artificial intelligence will be measured in years, not quarters, and carries a risk of significant short-term pain.
Speaking at the Empire Club in Toronto, Macklem urged both governments and businesses to take active steps to adapt to these pressures, stressing that Canada cannot afford to fail in managing the transition. He said that as the economy adjusts, growth will be modest, and that only over an extended period will productivity and potential output pick up.
"As the Canadian economy works through this transition, growth will be modest. In time, the economy restructures and productivity and potential output pick up, but this will be measured in years, not quarters," Macklem said. He added that the shift could proceed faster than expected, but it also could be "more painful than we'd like - particularly if the trade situation darkens or other shocks disrupt the economy."
Last week the Bank of Canada held its key policy rate at 2.25% for the second meeting in a row, and it reiterated that rates would remain unchanged so long as economic developments broadly match the bank's forecasts. At the same time, the bank has highlighted an unusually high degree of uncertainty around that outlook.
Macklem described the difficulty officials face in distinguishing between structural change and cyclical swings. He warned that misdiagnosing the source of economic weakness could lead to policy errors with adverse consequences for inflation and the pace of necessary adjustments.
Specifically, he noted the danger that cutting rates in response to apparent weakness could fuel inflation if that weakness stems from a smaller productive capacity rather than a temporary drop in demand. Conversely, stimulating demand when the economy is undergoing structural adjustment could postpone the reallocation and change that are required.
The Bank of Canada's forecasts indicate the labour force will scarcely expand over the coming years, and Macklem said he did not expect the unemployment rate to trend upward. On the role of artificial intelligence, he acknowledged that while AI could deliver economic gains and exert pressure on the labour market, corporate adoption so far has been modest and "it may be a while before we see a significant impact."
In his remarks, Macklem emphasized the need for careful policy and business responses to navigate the drawn-out and uncertain transition ahead.