ADAPTING TO STRUCTURAL FORCES, NAVIGATING UNCERTAINTY

The following information was released by The Bank of Canada:

Governor Tiff Macklem discusses how businesses and households are adapting to the long-term forces reshaping the Canadian economy. He then examines how renewed trade tensions and high energy prices are affecting the outlook for economic growth and inflation.

Businesses are adapting to structural changes

The Canadian economy is being reshaped by powerful long-term forces. Trade tensions, rapid advances in artificial intelligence (AI) and demographic shifts are all affecting how businesses operate and invest, how people work and how the economy grows.

There is mounting evidence that the economy is adapting. Businesses are adjusting their supply chains to reduce their exposure to tariffs, and many are looking beyond the United States for growth. They are adopting AI, investing in new technologies and working to attract and retain people with the skills they need.

This adaptation is helping strengthen the economy. Exports, growth and investment increased in recent months, and conditions in the labour market began to improve.

New challenges lie ahead

But the breakdown in Canada's trade negotiations with the United States and the ongoing conflict in the Middle East are creating challenges. Trade uncertainty makes it harder for businesses to invest and hire new workers, which can slow growth in the near term. At the same time, elevated oil and fuel prices have pushed inflation above the 2%target. How much these forces affect the economy depends on how long they last and how households and businesses react.

These challenges are pulling the economy in different directions. Tariffs are weighing on growth, while the war in the Middle East is pushing up inflation. And this is all happening at a time when Canadians are still feeling an affordability squeeze. This creates challenges for monetary policy.

How the Bank is responding

Monetary policy cannot reverse tariffs or change the price of gasoline. Rather, the Bank of Canada's role is to assess whether these shocks will have lasting effects on inflation and economic growth. It does this by analyzing data, talking with businesses, workers and community leaders across the country, and using advanced tools to assess risks and alternative scenarios.

Ultimately, the Bank's job is to keep inflation close to the 2% target.