Right now, Canada’s new government is forming at a time of huge economic uncertainty especially around its trading relationships.
The So What
“While recent, sudden shifts in global trade and markets are deeply unsettling for Canadians, it is important to remember that Canada’s economy has been losing momentum for some time,” says Managing Director and Partner Kathleen Polsinello, head of BCG in Canada.
“The opportunity is to seize this moment of change and disruption to proactively shape Canada’s economy to not only weather the near-term storms but to position the country to be more globally competitive.”
These are some of the key challenges facing Canada’s economy:
- Canada has had little or no GDP per capita growth over the last five years.
- Productivity is declining. Canada's relative position in GDP per capita has been slipping— from 92% of US GDP per capita in the 1980s to 67% today.
- Canada is particularly exposed to shocks from international markets as exports to the US make up a quarter of Canada’s GDP.
Increasing investment is key to help address some of these underlying economic challenges, Polsinello says, especially by doubling down on the engines of advancing AI, talent, and innovation.
At present, Canada would need to invest 50% more per worker to match US levels, amounting to a $250 billion yearly investment gap.
“Well-targeted spending can deliver economic gains beyond the initial outlay and also strengthen national resilience. Now is the time to close the investment gap and lay the foundations for future growth,” Polsinello says.
Now What
To drive far-reaching economic impact, three areas are of particular importance.
Energy Transition and Exports. Canada has abundant resources, including natural gas and some of the critical minerals needed for green technologies. But infrastructure such as ports, terminals, pipelines, and transmission lines require updates to enable the efficient export of more products to more locations. There is also significant potential to scale the deployment of clean sources of energy that further anchor economic resilience within the country.
Accelerating AI adoption also demands significant investment in infrastructure, including the need for new data centers, upgraded digital grids, and the ability to meet increasing power demand with clean energy sources.
Such large capital projects will benefit from streamlined regulatory approvals, greater clarity over the criteria for project approvals, and more predictability on timelines. Firms may also need to review talent strategies to ensure there are enough skilled tradespeople.
Investment in IP and Machinery. Underinvestment in intellectual property and machinery drives the majority of Canada’s gap to the US. This can delay innovation, productivity, and wage growth across multiple sectors. It also hinders progress toward the rollout of cleantech, such as the full-scale deployment of carbon capture, utilization, and storage (CCUS).
Strategic tax breaks, direct grants, or co-investment schemes can encourage businesses and entrepreneurs to pursue ambitious expansions in Canada. Incentives for companies to invest in productivity-enhancing measures, such as machinery and R&D can help to make businesses stronger both for the challenges today and to drive longer term competitiveness. Strengthening Canada’s financing ecosystem for scaling innovations and businesses is also critical, with opportunities for investors across the capital stack to lean into this moment with innovative financing methods such as catalytic or blended finance.
Accelerating of AI Adoption. Although Canada has strong workforce skills and research capabilities, it is lagging peer nations in AI investment, development, and corporate integration. Canada trails OECD peers two to three times in AI adoption. Companies that accelerate the pace of adoption stand to become leaders in the AI space. Building solid business cases and committing to upskilling employees will underpin this ambition. A robust regulatory and security framework as well as strong public-private sector collaboration will be key in integrating AI responsibly and sustainably into organizations. Commercialization can be further encouraged through a more agile and interoperable regulatory framework.
“Investing in and mobilizing talent is the common thread for success across all of these ambitious projects,” says Veronica Chau, a BCG partner and director based in Toronto.
“This is an ‘all hands on deck’ moment to equip and enable the many people in Canada to shape its future together,” she says.
