BoC Governor Macklem says restructuring the Canadian economy to cope with US tariffs, slower population, and the rise of AI will take years, and could be very painful

• Macklem urged policy makers and businesses to do all they could to adjust to the new challenge, saying Canada could not afford to fail.
• As the Canadian economy works through this transition, growth will be modest.
• Adding it all up, economy is forecast to grow—but it’s soft growth. Expect GDP growth to average only about 1¼% over the next two years.
• Have to be careful not to misdiagnose economic weakness. Monetary policy should not try to compensate for lost supply.
• 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.
• In short, will be working hard to identify and assess the relative importance of cyclical and structural changes. Through it all, 2% inflation target will remain our ultimate policy beacon.

Governor Macklem's comments on Canada's economic restructuring highlight a cautious yet clear outlook for growth, emphasizing the pain of transition due to external pressures like US tariffs and demographic challenges. His remarks suggest that while growth is expected, it will be modest and accompanied by a persistent focus on the 2% inflation target, which indicates that the Bank of Canada may resist aggressive rate cuts despite softness. This nuanced stance signals careful calibration of monetary policy to address structural issues without risking future inflation, thus maintaining a vigilant approach to both cyclical and structural factors in the economy.