Key Takeaways:
- Canada’s economy faces significant challenges in 2026, including stagnant investment, declining productivity, and a reliance on US trade.
- The country’s productivity performance has sharply declined over the past decade, with real GDP per capita falling below the OECD average.
- Investing in intangible assets, such as intellectual property, is crucial for Canada’s economic success and independence.
- The manufacturing sector has been severely impacted by US trade policy, with sector-specific tariffs hitting industries such as steel, aluminum, and autos.
- Canada’s economy is not just struggling at the national level, but also at the provincial level, with all 10 provinces experiencing miserable growth.
Introduction to Canada’s Economic Challenges
Canada survived the first year of the second Trump presidency with its economy mostly intact, but the country is now facing significant challenges in 2026. Economists, analysts, and investors have identified several key charts that will be important in the coming year, including those related to productivity, investment, and trade. According to David Wolf, portfolio manager at Fidelity Investments, stagnant investment has been a major cause and consequence of Canada’s economic struggles, and the country must do better to boost public and private investment. The 2025 federal budget set out an ambitious agenda to address this issue, but its success remains to be seen.
The Importance of Productivity
Productivity is a crucial factor in determining Canadians’ living standards, and the country’s productivity performance has sharply declined over the past decade. Trevor Tombe, professor of economics at the University of Calgary, notes that Canada’s real GDP per capita has fallen below the OECD average for the first time since comparable data has been available. This decline is a deeper concern than just comparing Canada to the US, as it signals a broader issue with the country’s economic competitiveness. The federal government has launched a new productivity and investment agenda, but its success will depend on various factors, including the ability to attract investment and boost innovation.
Investing in Intangible Assets
Investing in intangible assets, such as intellectual property, is crucial for Canada’s economic success and independence. Laurent Carbonneau, director of policy and research at the Council of Canadian Innovators, notes that companies and their home economies grow on a foundation of data, patents, and other IP. The US, in particular, uses its IP edge as a lever to discipline allies and rivals alike, and Canada must invest in intangible assets to stay competitive. This investment is not just important for economic success but also for strategic leverage and independence.
The Impact of US Trade Policy
The manufacturing sector has been severely impacted by US trade policy, with sector-specific tariffs hitting industries such as steel, aluminum, and autos. Alan Arcand, chief economist at Canadian Manufacturers & Exporters, notes that manufacturing employment in Canada has fallen by almost 30,000 jobs since March 2025. However, manufacturing employment is also down nearly 60,000 in the US, as higher input costs and supply chain disruptions take hold. This raises doubts about whether the tariff strategy can truly support reshoring efforts, and the key question is how much more damage will be done before the US recognizes Canada’s essential contribution to its manufacturing competitiveness.
Provincial Economic Performance
Canada’s economy is not just struggling at the national level, but also at the provincial level, with all 10 provinces experiencing miserable growth. Ben Eisen, senior fellow, and Jake Fuss, director of fiscal studies, at the Fraser Institute, note that historically, there has often been regional variation in provincial economic performance. However, the current malaise is consistent across all 10 provinces, with Ontario, once the engine of Canada’s economy, averaging minus 0.1 percent growth, and Alberta performing even worse, at minus 0.8 percent.
Labour Productivity
Labour productivity is a critical factor in determining Canada’s economic performance, and the country’s labour productivity growth has been lethargic. Pedro Antunes, chief economist at the Conference Board of Canada, notes that real output per hour worked is just 1.9 percent higher than in 2017. To better understand the decline, it is essential to drill down to the industry level, especially in sectors critical to Canada’s nation-building ambition. Unfortunately, a drop in transportation and construction labour productivity accounts for much of the weakness, with construction productivity down nearly 7 percent from 2017.
Business Investment
Business investment in machinery and equipment is essential to raising productivity, wages, and competitiveness. Bill Robson, president and CEO of the C.D. Howe Institute, notes that Canadian workers have always enjoyed less investment than their US counterparts. However, investment per available worker by Canadian business was around 60 cents for every dollar invested by US businesses in the 2000s, and it fell to the 40-cent range over the past decade. US workers are gaining access to better tools and technologies, while in Canada, investment is so low that capital per worker is shrinking.
Conclusion
In conclusion, Canada’s economy faces significant challenges in 2026, including stagnant investment, declining productivity, and a reliance on US trade. The country must invest in intangible assets, boost innovation, and attract investment to stay competitive. The federal government’s new productivity and investment agenda is a step in the right direction, but its success will depend on various factors. As the country looks to expand investment in resource projects, bolster housing construction, and diversify trade corridors, its success will also hinge on improving productivity performance, especially in key industries such as transportation and construction.