Canada’s economy is currently facing significant challenges as both productivity growth and population expansion stall simultaneously, raising concerns about the country’s long-term economic prospects. For much of the past decade, population growth—largely driven by immigration—helped mask persistent weaknesses in labour productivity. However, recent declines in immigration have exposed underlying structural issues, leaving the economy without either of its primary growth drivers.

Statistics Canada recently reported a 0.5 percent drop in labour productivity within the business sector in the first quarter of 2026, marking the second consecutive quarter of decline. Senior economist Sal Guatieri of the Bank of Montreal described the figures as “very disappointing,” warning that an absence of improvement could pose risks to Canada’s sustainable growth.

Compounding the problem is a shrinking population, a first in Canada’s history, driven by tightened immigration controls that are expected to remain in place until at least the end of 2027. These policy changes have reversed the rapid influx of temporary foreign workers and international students seen during the pandemic, a surge that at its peak saw immigration rates four times higher than typical levels.

Canada’s growth forecast for 2026 reflects these pressures, with projections around 0.7 percent GDP growth, according to recent economic surveys. The current environment marks a critical “transition period” as policymakers and businesses reckon with the challenge of expanding the economy without relying on immigration-driven labour force growth.

Underlying the productivity slump, experts point to longstanding structural issues. Canada’s output per hour worked has increasingly lagged behind the United States, widening from a 20 percent shortfall in 2000 to approximately 30 percent today. Factors cited include limited competition, regulatory hurdles, and especially insufficient business investment. Business investments in machinery and equipment have declined by about 20 percent per worker over the past decade, while spending on research and development remains notably low compared to other advanced economies.

While the world enters a new phase of technological innovation—particularly in artificial intelligence and digital transformation—Canada appears to be falling behind. Recent analysis indicates that AI-related spending accounted for roughly 30 percent of U.S. economic growth last year, but only 5 percent in Canada.

Trade relations with the United States also continue to influence Canada’s economic dynamics. Since 2016, employment growth in industries serving U.S. markets has remained stagnant at about 2.8 percent, significantly lagging behind the broader economy, which saw job growth near 20 percent. This trend reflects the lingering effects of U.S. trade protectionism initiated during the Trump administration, which has placed additional pressure on Canada’s manufacturing, agriculture, and construction sectors—key contributors to productivity declines.

Despite these challenges, there are signs that Canadian businesses are beginning to adapt. Recent corporate earnings reports show diminishing concern over tariffs, suggesting some adjustment to the new trade realities. Nonetheless, economic analysts emphasize the urgent need to revive productivity gains as a critical step toward restoring Canada’s growth trajectory and offsetting the loss of immigration-driven labour expansion.