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Canada’s economic challenge is not difficult to identify. The Bank of Canada has repeatedly warned about weak productivity. The Organization for Economic Co-operation and Development (the OECD) made that central to its most recent assessment of Canada.
Across the policy spectrum, there is broad agreement about the symptoms: weak business investment; slow technology adoption; disappointing productivity growth; heavy reliance on the U.S. market; and an economy that has been too comfortable with underperformance for too long.
The problem is not that Canada is in crisis. It is that Canada is not in crisis.
This is what makes the country’s growth problem harder to solve. Canada remains wealthy, stable and highly livable. Its financial system is sound. Its institutions are strong. It has abundant natural resources, human capital and privileged access to the world’s largest market. These are real strengths. But they have also made it easier to postpone the necessary structural reform.
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Canadians aren’t imagining the cost-of-living crisis
Canada’s core economic problem is best understood not as a sudden decline but rather as relative stagnation under conditions of continued prosperity. The country has drifted into what might be called a comfort trap, where the economy creates a level of affluence strong enough to hide overall weak performance and stable enough to delay the reforms needed to restore long-term growth.
The result is not collapse. It is a gradual weakening of the mechanisms that generate sustained prosperity: productive investment, technology diffusion, commercialization, capital deepening and market diversification.
Change is essential and this is a good moment for Canada to act in five key areas:
- creating a true national market with fewer interprovincial and other barriers;
- moving more technological innovation from research to widespread business use;
- raising business investment, which remains central to Canada’s productivity challenge;
- focusing industrial strategy on areas of clear comparative strength rather than doing everything at once;
- giving digital services a more central place in trade diversification.
The problems are widespread
Canada’s challenge is not simply that growth has slowed. It is that the country has settled into a lower-growth equilibrium characterized by three reinforcing features: weak competitive pressure, weak innovation conversion and weak capital deepening.
First, competitive pressure is too often insufficient. Interprovincial barriers, fragmented standards, uneven labour mobility and longstanding protected arrangements reduce the intensity of competition in parts of the economy.
That matters because firms rarely invest, modernize or reorganize at scale unless forced to do so. Competition policy should therefore be understood not only as a consumer issue but also as a productivity issue.
Second, Canada is stronger at generating research than at turning that knowledge into scaled economic activity. The country has world-class research strengths, including in artificial intelligence, but commercialization and business adoption remain weaker than they should be.
Too much of current innovation policy focuses on research inputs rather than adoption, scale-up and firm-level diffusion. Good science matters, but productivity rises only when firms absorb new technologies and reorganize around them.
Third, business investment per worker has lagged behind peer countries, while too much capital has continued to flow into housing and other low-risk assets. This is not just a housing-affordability problem. It is also a growth problem. An economy in which real estate repeatedly offers more attractive returns than productive investment should not be surprised by weak business dynamism.
These three weaknesses reinforce one another. If competition is weak, firms face less pressure to adopt new technologies. If innovation is not commercialized effectively, research strength does not translate into productivity gains. If capital continues to favour property over production, firms underinvest further. Over time, this becomes a self-reinforcing circle.
Where the problems lie
Two structural features have made this equilibrium easier to ignore.
The first is resource wealth. Canada’s energy, mining, agriculture and hydroelectric endowments are major national assets. But resource strength has often acted as a buffer rather than a transformation mechanism. When resource prices are supportive, they can soften the warning signals that would otherwise come from weak business investment and slow productivity growth.
The problem is not resources themselves. It is the absence of a sufficiently strong framework for converting resource strength into wider productivity-enhancing capability.
The second is proximity to the United States. Access to the American market has been a major advantage, but it has also made strategic complacency easier. Canadian firms are not forced into a global orientation as early or as aggressively as firms in smaller economies.
At the same time, Canada’s domestic market is not large enough to produce scale on its own. The result is that many firms remain domestically viable and U.S.-adjacent without becoming broadly competitive internationally.
This helps explain why Canada’s trade diversification remains weaker than it should be despite multiple international agreements. It also helps explain why digital services deserve much more attention. In digitally tradable sectors, geography matters less. For a country with strong human capital and research capacity, this should be one of the most promising avenues for diversification and scale.
However, Canada may now have a better window for reform than it has had in years.
The risks of concentrated dependence on the U.S. market are more visible. The limits of population growth as a substitute for productivity growth are clearer. The importance of internal trade has gained more political attention. There is also wider recognition that weak productivity is not a narrow business issue but rather a national living-standards issue.
But policy windows do not stay open indefinitely. Awareness alone will not change outcomes. Canada does not need a long list of initiatives. It needs more disciplined reform focused on a few priorities that could change the incentives facing firms and investors.
Five steps Ottawa can take
First, internal market integration and competition reform should be treated as a top priority. Reducing interprovincial barriers, improving labour mobility, harmonizing standards where feasible and reviewing concentrated or protected sectors more seriously would increase competitive pressure across the economy. Without this, other policy efforts will have limited impact.
Second, Canada does not need to stop funding research but it does need to place greater emphasis on procurement, first-customer pathways, applied commercialization support, management capability, standards and firm-level technology uptake. The goal should be to move more innovations into widespread business use.
Third, capital allocation should be treated as a growth issue. Weak business investment is central to the productivity problem. Canada should improve the environment for growth capital and productive investment while reducing the structural incentives that continue to direct a disproportionate share of capital toward real estate.
Fourth, industrial strategy should be selective rather than diffuse. Canada should concentrate its efforts in a limited number of domains where it has genuine advantages and where those advantages could translate into export capacity, scale and productivity gains. Low-carbon resource processing, selected energy technologies, critical-minerals processing, industrial AI in resource operations and digitally delivered services are plausible candidates. The standard should be outcomes, not announcements.
Fifth, digital services should be elevated within Canada’s trade-diversification strategy. This is one of the few areas where geographic constraints matter less and where Canada has credible ingredients for global expansion. It should play a much larger role in how the country thinks about diversification.
The time is now
Canada still has substantial room to act. That is precisely why this moment matters.
The country’s challenge is not whether it can survive without reform. It can. The challenge is whether it is willing to accept lower dynamism, weaker productivity and more limited economic ambition than its advantages should allow.
That is the real danger of the comfort trap. It does not force change. It makes delay feel affordable.
Canada still has the strengths needed to reverse course. The question is whether it will use them while there is still ample space and time to do so.
