Canada at a crossroads

Canada's growth model is changing

Canada's economy is entering a new phase. For much of the past decade, growth was supported by rapid population gains, a resilient housing market and predictable access to the US market. Today, each of these drivers is becoming less reliable.

While Canada may avoid a recession, economic growth is likely to remain below potential as households contend with elevated debt, productivity remains weak and trade uncertainty weighs on business investment. Unlike a typical cyclical slowdown, these are structural shifts that could shape Canada's economic outlook—and financial markets—for years to come.

Structural shifts are reshaping the outlook

Canada's changing trade relationship with the US represents one of the country's most significant structural challenges. For decades, Canadian businesses benefited from predictable, rules-based access to their largest export market. That certainty has diminished.

Rather than providing a long-term framework, CUSMA now faces annual reviews through 2036, increasing uncertainty for exporters and businesses making long-term investment decisions.

Source: Bank of Canada

Demographics add another layer to this transition. After several years of exceptionally strong population growth, labour force expansion is slowing. Future economic growth will increasingly depend on productivity improvements rather than workforce expansion.

Canadian productivity has lagged the US for much of the past two decades, limiting wage growth, business investment and long-term economic resilience.

Productivity Divergence
Output per unit of labor (2000 = 100)

Source: Statistics Canada, US Bureau of Economic Analysis as of March 31, 2026.

Canada's productivity gap with the US highlights one of the country's most persistent structural challenges. While artificial intelligence may improve productivity over time, those gains are unlikely to emerge quickly enough to offset today's economic headwinds.

Artificial intelligence represents both an opportunity and a challenge. While it has the potential to improve productivity over the long term, meaningful gains are unlikely to materialize quickly enough to offset today's structural headwinds.

Real GDP per capita has continued to lag the US, underscoring the combined effects of weaker productivity and slower economic momentum.

A widening gap in living standards
Real GDP per Capita Growth (2000 = 100)

Source: Statistics Canada, US Bureau of Economic Analysis as of March 31, 2026.

The divergence in real GDP per capita illustrates how Canada's structural challenges are increasingly affecting household prosperity and long-term growth potential.

Investor takeaway: Slower population growth, weaker productivity and greater trade uncertainty are likely to keep Canada's growth below trend, reinforcing the importance of active portfolio positioning.

Cyclical headwinds remain

Alongside these structural changes, cyclical pressures continue to weigh on the economy. Consumers have become more cautious as labour market conditions soften and wage growth moderates. While spending has remained resilient, elevated household debt continues to constrain discretionary consumption.

The cash flow brake on Canadian consumption
Leverage: Household debt to disposable income (%)

Source: Statistics Canada, US Bureau of Economic Analysis as of March 31, 2026.
Individual financial reports and supplementary regulatory disclosures of Canada's major chartered banks (RBC, TD, BMO, BNS, CIBC, National Bank) as of Q1 2026. Bond yields as of June 30, 2026.

Canadian households continue to carry significantly higher debt levels than their US counterparts, leaving consumers more sensitive to higher borrowing costs and limiting the potential for a broad-based rebound in spending.

The housing market also remains under pressure. Home prices have declined from their 2022 peak, while elevated condominium inventory in Ontario and British Columbia continues to weigh on activity. The remaining wave of pandemic-era mortgage renewals is expected to add further pressure as borrowers transition to higher borrowing costs.

Canadian Mortgage Renewal Wave
Rate reset from record low to higher interest rate

Source:  Statistics Canada, US Bureau of Economic Analysis as of March 31, 2026.
Individual financial reports and supplementary regulatory disclosures of Canada's major chartered banks (RBC, TD, BMO, BNS, CIBC, National Bank) as of Q1 2026. Bond yields as of June 30, 2026.

Higher mortgage payments are expected to continue weighing on household cash flow, reinforcing pressure on consumer spending.

These challenges are reflected in Canada's broader economic performance.

Investor takeaway: Elevated household leverage, weaker housing activity and slowing consumer spending are likely to keep domestic growth below trend, supporting a more constructive outlook for Canadian fixed income.

Considerations for investors

Markets continue to focus on inflation risks but may be underestimating Canada's domestic growth challenges. Slowing population growth, weak productivity, housing market softness and highly leveraged consumers all point to an economy that is likely to remain constrained even as inflation moderates.

If growth continues to disappoint, the Bank of Canada could have greater scope to ease monetary policy than markets currently anticipate. In this environment, actively managed fixed income strategies may be well positioned to capitalize on changing rate expectations, evolving yield curve opportunities and selective credit market dislocations.

Key takeaways

• Canada's traditional growth drivers are becoming less reliable.
• Productivity will play a larger role in future growth but is unlikely to improve quickly.
• Elevated household debt and housing market weakness continue to constrain the economy.
• Markets may be underestimating the potential for lower Canadian interest rates.
• The evolving macroeconomic backdrop supports a constructive outlook for Canadian fixed income.

Mackenzie fixed income solutions

Canada's evolving macroeconomic backdrop may favour active fixed income strategies that can respond to changing interest rate expectations, manage duration dynamically and identify opportunities across sectors and issuers. Mackenzie offers ETF solutions that can help advisors position portfolios for this environment.

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