Key Takeaways
- The world is undergoing significant changes, and Canada needs to adapt quickly to remain competitive.
- The country faces various risks, including the need to build its military, navigate the impact of advanced technologies, and manage its relationships with other nations.
- The United States is experiencing a political revolution, which could have significant implications for Canada and the global economy.
- China’s deflationary spiral is deepening, and the country’s prioritization of political control and technological supremacy over consumption stimulus and structural reforms could have far-reaching consequences.
- The increasing use of artificial intelligence (AI) poses significant risks, including the potential for AI companies to adopt business models that threaten social and political stability.
- Canada’s economic prospects are threatened by a deepening asymmetry of federalism, which could make it harder to design and implement a unified economic strategy.
Introduction to the Challenges Ahead
The world is undergoing a series of once-in-a-generation shocks and adjustments, and Canada needs to adjust rapidly to remain competitive. The country faces various risks, including the need to build its military, navigate the impact of advanced technologies, and manage its relationships with other nations. The compression of time and risks means that no company or government can afford to wait and watch, and instead must take proactive steps to mitigate these risks. The report by Eurasia Group and RBC Thought Leadership provides a comprehensive analysis of the top risks facing Canada in 2026, including the global risks that are most likely to impact the country and the significant domestic forces that may shape the year ahead.
Remilitarizing the Maple
Canada is looking to build its military, develop an industrial base, and forge new commercial partnerships at a wartime pace. The country’s enthusiasm for rapid militarization began when Donald Trump demanded more from America’s NATO allies and deepened as he mused about taking over parts of the Western Hemisphere. The task of building a big military is daunting, and the country faces significant challenges, including a public that barely remembers the losses of the Afghan mission and a military bureaucracy that has struggled with much smaller magnitudes of procurement and deployment. The industrial base is a further challenge, with Canada ranking 27th out of 31 NATO nations in terms of military spending as a share of GDP.
U.S. Political Revolution
The United States is experiencing a political revolution, with President Donald Trump’s attempt to systematically dismantle the checks on his power, capture the machinery of government, and weaponize it against his enemies. This revolution is qualitatively different from what even the most ambitious American presidents have attempted, and it has significant implications for Canada and the global economy. The administration views this project not as an assault on democracy but as its restoration, a necessary purge of a political system captured by a deeply corrupt establishment that had already weaponized government against them. Over 77 million Americans voted for Trump in 2024, and many of them sympathize with this diagnosis, believing that the system was already broken and wanting someone who would disrupt it.
China’s Deflation Trap
China’s deflationary spiral is deepening, and the country’s prioritization of political control and technological supremacy over consumption stimulus and structural reforms could have far-reaching consequences. Home prices in China have been falling for four and a half years, resulting in household wealth destruction on par with America’s 2008 crash, except it’s still accelerating. Consumer confidence, investment, and domestic demand have cratered, and Beijing has bet big that high-tech manufacturing would fill the gap left by property. However, state-driven investment has created overcapacity, and weak domestic demand means there aren’t enough buyers to absorb it. The result is "involution," where too many Chinese firms are chasing too little demand, slashing prices to survive, and forcing even well-run firms to cut wages and jobs to stay afloat.
AI Eats Its Users
The increasing use of artificial intelligence (AI) poses significant risks, including the potential for AI companies to adopt business models that threaten social and political stability. While AI has revolutionary potential, it can’t live up to investors’ expectations in the short term, and the most advanced models still hallucinate. Business adoption has been uneven, with only about 10% of U.S. firms using AI to produce goods and services. Many companies report significant productivity gains, but surveys suggest most have yet to see meaningful bottom-line impact. The pressure to generate revenue and the lack of guardrails could lead AI companies to adopt business models that prioritize short-term gains over long-term sustainability and social responsibility.
The Charter Strikes Back
Canada’s economic prospects are threatened by a deepening asymmetry of federalism, which could make it harder to design and implement a unified economic strategy. Different views among Ottawa, the provinces, and Indigenous governments over how to use natural resources, fund and deliver education, and stabilize a strained healthcare system are pulling Canada further toward a patchwork of policy regimes. Constitutional tools that were once seen as last resorts, such as the notwithstanding clause, are becoming more commonplace, raising the odds that provinces and Indigenous groups will weaponize hard and soft vetoes on national priorities. The consequences for national unity are more serious than at any point since the 1990s, and foreign governments, activist networks, and corporate actors may exploit jurisdictional tensions to weaken Canada’s coherence as a U.S. ally and G7 partner.
