Canada’s economy appears to be at a crossroads with its unique set of challenges, and Stephen Poloz, former Governor of the Bank of Canada, has expressed concerns.
In a speech delivered on February 5, 2025, at the Canadian Club Toronto, Poloz emphasized the fragile and uncertain state of the nation’s economic health and proposed strategies to get it get on track.
With U.S. trade tensions increasing, declining business investment, and a difficult job market for younger Canadians, Poloz said that the time for decisive action is now—before external pressures, like potential tariffs from a Trump presidency, further exacerbate a weak foundation.
Poloz noted that Canada’s current economic situation is not looking very promising.
While the country appears to have survived the COVID-19 pandemic relatively well, its resilience has eroded over the past few years, especially when compared to many of the world’s leading economies.
Moreover, high interest rates are negatively impacting households and businesses as well, and business investment has relatively modest for over a decade.
Meanwhile, younger citizens are now dealing with the most challenging job market since the 1990s.
Adding to these issues, Poloz cautioned that U.S. tariffs could slash up to 5% off Canada’s GDP—a permanent loss that could send the Canadian dollar plummeting by as much as 20%.
This would make imports costlier, hitting consumers hard even if it offers a temporary boost to exporters.
Retaliatory tariffs, he argued, would only deepen the damage by driving up costs further.
However, Poloz sees opportunity amid the challenges.
Instead of relying solely on tit-for-tat trade measures, he urged Canada to strengthen its economic resilience from within.
One of his suggestions is to dismantle internal trade barriers—a move he likened to “free money” lying unclaimed on the table.
Historically, Canada unified in 1867 partly in an effort to counter U.S. trade threats, making today’s interprovincial restrictions an ironic hindrance.
By fostering improved domestic trade, Canada could unlock growth without waiting for external relief.
Another key pillar of Poloz’s plan ties trade policy to national defense.
He argued that Canada’s underinvestment in its military—long a sore point for U.S. policymakers—could be leveraged to improve trade relations.
Poloz proposed a modest defense tax, equivalent to 1-2% of GDP, to boost military spending.
This could signal to the U.S. that Canada is a committed partner, potentially softening tariff threats.
While politically sensitive—requiring either tax hikes or budget cuts elsewhere—Poloz sees it as a trade-off to safeguard the broader economy.
Poloz also pointed to Canada’s decade-long slump in business investment, a critical driver of productivity and growth.
He criticized the lack of innovation and modernization among Canadian firms, urging policymakers to introduce tax incentives to spur companies into action.
Without such measures, Canada risks falling behind in competitiveness, especially as trade uncertainties deter investment.
Poloz’s call to action is clear: bolster the private sector to build a more resilient economic base.
The stakes, he emphasized, are high.
A tariff shock today would hit harder than during the pandemic, when Canada’s economy was buoyed by low unemployment and stable inflation.
Now, with weaker fundamentals, the country is ill-prepared for a prolonged trade war.
Poloz’s warnings echo a broader concern: if Canada doesn’t act proactively, it could lose ground in global trade and innovation, leaving future generations to bear the cost.
Poloz offered a mix of caution and optimism. The challenges are significant—trade tensions, a fragile economy, and structural weaknesses—but not insurmountable.
By focusing on internal reforms, strategic defense spending, and business investment, Canada can chart a path to stability and growth.
His message serves as a wake-up call: bold, forward-thinking policies today can shield the nation from tomorrow’s storms. As Poloz put it, the time to act is now—before the window of opportunity slams shut.