Key Takeaways
- The renegotiation of the Canada-United States-Mexico Agreement (CUSMA) is the biggest risk facing Canada’s economy in 2026, according to former Bank of Canada deputy governor Paul Beaudry.
- Trade instability could derail Canada’s still-fragile recovery, and the country may face steep tariffs imposed by the US.
- Beaudry predicts that interest rates will likely hold steady or fall in 2026 if economic conditions weaken or CUSMA negotiations falter.
- The rapid expansion of artificial intelligence investment poses financial market risks, and current Big Tech valuations may not be sustainable.
- Canada needs to adopt and commercialize new technologies to remain competitive and help workers transition across sectors.
Introduction to CUSMA and Its Impact on Canada’s Economy
The Canada-United States-Mexico Agreement (CUSMA) is a critical trade agreement that has a significant impact on Canada’s economy. According to former Bank of Canada deputy governor Paul Beaudry, the uncertainty surrounding the renegotiation of CUSMA is the single biggest risk facing Canada’s economy in 2026. Beaudry stated that trade instability could derail a still-fragile recovery, and Canada may face steep tariffs imposed by the US. This uncertainty is due to the unpredictable nature of the US administration, making it challenging to predict what they want and what they are ready to do.
Trade Instability and Its Effects on Canada
Canada has so far avoided the steep tariffs imposed on other US trading partners, but Beaudry warned that this may change. The mandatory review of CUSMA will intensify next year, and the US is expected to submit a report detailing the changes it wants to Congress early next year. The formal review begins in July, and Dominic LeBlanc, the federal minister responsible for Canada-US trade, is expected to visit Washington in January to start talks with his US counterparts. Beaudry noted that some industries face challenges, but trade between Canada and the US continues relatively smoothly. Products such as grains, pulses, and dairy generally face low tariffs compared with other international markets, while energy exports and machinery cross the border with minimal barriers.
Monetary Policy and Interest Rates
Beaudry also discussed monetary policy, stating that inflation has broadly returned to the Bank of Canada’s two per cent target, but underlying pressures remain. He flagged the risk that US policy could complicate Canada’s path if the US Federal Reserve becomes more tolerant of higher inflation. Beaudry does not expect interest rate hikes in 2026, predicting that rates will likely hold steady or fall if economic conditions weaken or CUSMA negotiations falter. He noted that the US Republicans are struggling in polls due to rising prices, which suggests that adding more tariffs isn’t politically popular right now, giving Canadians some reason for optimism.
Artificial Intelligence and Financial Market Risks
Beaudry also cautioned about growing financial market risks linked to the rapid expansion of artificial intelligence investment. He said that AI will remain transformative, but questioned whether current Big Tech valuations are sustainable. Beaudry noted parallels to the years leading up to the 2008 financial crisis, where companies that invested heavily in new technologies did not necessarily reap all the benefits. He emphasized the importance of adopting and commercializing new technologies to remain competitive and helping workers transition across sectors.
Conclusion and Recommendations
In conclusion, Beaudry emphasized that Canada needs to do more to adopt and commercialize new technologies to remain competitive. He called for greater risk-taking to ensure innovation and productivity growth. Achieving these goals will cost money, and Beaudry noted that Canada continues to struggle to attract investment amid all the tariff and trade uncertainty. Ottawa is trying to make the country more appealing to investors, including a $1.7-billion, 13-year strategy to recruit top international talent. Beaudry is optimistic about potential improvements in 2026, but said that meaningful change will take time. As the Canadian economy navigates the challenges of CUSMA renegotiation and trade instability, it is essential to prioritize technological adoption, innovation, and competitiveness to ensure a strong and resilient economy.