Canada’s wait-and-see economy is in a very fragile state

In the past few weeks, news on the Canadian economic front has tilted negative overall. Statistics Canada came out with a February jobs report that showed employment declined by a net 84,000, which came on top of a loss of 25,000 jobs in January. The cumulative decline makes it the worst start to a year employment-wise since 2009. GDP figures released late last month showed that Canada’s economy contracted in the final quarter of 2025, capping the weakest year for growth since the pandemic. And then, two more recent reports with sobering overtones. The Bank of Canada took a cautious tone in its rate decision, flagging both downside risks for growth, as well as upside risks for inflation because of rising energy prices amid war in the Middle East. The central bank’s policy makers, who left interest rates unchanged, are cautioning us that they may be handcuffed in supporting the economy should inflation pressures renew. Separately, data released from Statistics Canada showed that Canada’s population declined in 2025 for the first time on record, a decrease of just over 100,000. This is the result of a government-engineered effort to reduce immigration into the country, taking pressure off housing markets and curbing competition for jobs. But it’s also acting as a drag on demand. Put it all together, and we see an economy facing several headwinds:  threats to near-term growth, the risk of renewed inflationary pressures, and heightened uncertainty. Still, it’s easy to overstate weakness, especially at a time of war. A more nuanced picture is probably closer to the truth of where the state of the economy really is. For instance, the jobs report includes a lot of noise because of lower immigration. Our declining employment reflects, in part, a shrinking labour force, not job losses. There’s actually little evidence people are losing their jobs en masse. The share of employed workers becoming unemployed in any one month—what economists call the “separation rate”—is at or even below normal levels. Wage gains, meanwhile, remain strong. Rather, the most prominent feature in the labour market right now is a defensive “wait-and-see” position from Canadian businesses. Employers aren’t hiring or firing. Which means that if you have a job, you may be ok. If you don’t, you may be in trouble. This is bad news for Canada’s long-term unemployed and youth. But it’s not generalized weakness. We see similar “low-velocity” patterns in the GDP numbers as well. Real GDP (adjusted for inflation) rose on average by 1.7 percent over the past year, which is not great, but still not too bad considering all of the headwinds. And there are areas of robustness. We are seeing governments spending more on infrastructure, which is good news. We are still seeing consumers spending, also good. Retail sales data out late last week for January and February were particularly strong. Rising commodity prices, meanwhile, should help Canada’s struggling exporters. The big down story is stagnant capital spending by businesses, a longstanding issue that predates Prime Minister Mark Carney and Donald Trump’s re-election and reflects a combination of policy uncertainty, cumbersome regulatory and permitting issues and, frankly, a decade of outright hostility towards the business sector by the previous government. The uncertainty over the past year is just feeding into the investment chill, despite the change of tone in Ottawa. As a result, business investment was flat in 2025, a fourth straight year of weakness. This is the exact opposite of what Carney wants to see. Our economy is overly reliant on consumer spending and not enough on business investment, which is needed to boost productivity and support economic growth in the long run. Perhaps, a better way to think about the current moment is that of an economy facing crosswinds and being pushed in different directions. On one hand, we have trade tensions with the United States affecting exports, but more importantly, affecting business confidence and investment. On the other hand, we have other forces that continue to provide support. Interest rate reductions in the past two years are beginning to take effect, making it cheaper for households to carry debt and  buy big-ticket items. Strong financial markets, at least until this recent conflict in the Middle East, have been providing support to households as well through wealth effects. Higher commodity prices are providing support to business profits and national income. And government investment and spending continue to underpin demand in the economy. In fact, most economists expect that economic growth will resume to about 2 percent by the second half of this year, assuming that uncertainty begins to dissipate. The recent conflict in the Middle East, however, threatens to muddy the base-case outlook. The Canadian economy is doing okay given the circumstances, but it’s doing okay in a very fragile state. We’re not in a recession, but we’re not in a growth cycle either. The underlying fundamentals are weak because of a lack of business investment. Canada is stuck in a low-velocity economy, waiting for greater certainty that we all hope will one day come.