Canada’s Balancing Act: Slow Growth, Soft Inflation, and the Long Road to Confidence

Canada’s Balancing Act: Slow Growth, Soft Inflation, and the Long Road to Confidence by Maj (ret’d) CORNELIU, CHISU, CD, PMSC FEC, CET, P.Eng. Former Member of Parliament Pickering-Scarborough East As 2025 draws toward its close, Canada finds itself walking a fine economic line, not in crisis, but not quite in comfort either. Inflation, the ghost that haunted households through the pandemic years, is largely tamed even thought it has lately shown a tendency to rise again. Growth, however, remains tepid, leaving policymakers at the Bank of Canada facing a familiar dilemma: how to keep the economy moving without reigniting the price pressures they fought so hard to subdue. The latest figures from Statistics Canada show annual inflation rising to 2.4 percent in September 2025, up slightly from 1.9 percent in August. The jump resulted mainly from smaller declines in gasoline prices and persistent increases in rent and food costs. On the surface, the number still sits comfortably within the Bank of Canada’s 1-to-3 percent target band, but the upward movement hints at inflation’s stubborn core. Core measures of inflation, those that strip out volatile items like energy, hover closer to 3 percent, a level that keeps central bankers cautious. “We’re seeing encouraging signs, but underlying price momentum hasn’t fully cooled,” a senior Bank economist noted in a recent policy briefing. “It’s premature to declare victory.” For consumers, the relief is relative. Grocery prices are stabilizing but remain high compared to pre-pandemic norms, and rents continue to outpace wage gains in many metropolitan areas. The psychological fatigue from years of price turbulence is evident: Canadians are spending less freely and saving more defensively, even as inflation moderates. While inflation shows signs of normalization, the broader economy has yet to regain its stride. The Bank of Canada’s January 2025 Monetary Policy Report projected real GDP growth of around 1.8 percent this year, edging up modestly in 2026. Independent forecasters, including the OECD, are less optimistic, predicting growth closer to 1.0 percent. The reasons are structural as much as cyclical. Business investment remains soft, productivity growth is flat, and global demand for Canadian exports is lukewarm. Even the housing market, once the engine of national expansion, has cooled under the weight of past rate hikes and new immigration policies slowing population growth. “Canada’s productivity problem has reached emergency status,” warned a recent Wall Street Journal analysis citing senior central-bank officials. Despite record immigration levels earlier in the decade, per-capita output has stagnated, leaving Canadians poorer in relative terms. Households, still burdened by record levels of debt, have become far more cautious. Mortgage renewals at higher rates continue to strain disposable incomes. Many families are postponing major purchases, from vehicles to renovations. Consumer confidence surveys show a population anxious about the future wary of job security, skeptical of government spending, and uncertain about when relief might arrive. The Bank of Canada’s own business outlook surveys echo that mood. Firms report weaker sales and shrinking profit margins, with hiring intentions moderating across most sectors. Exporters, particularly in manufacturing and energy, face the double challenge of slower U.S. demand and global trade frictions. Yet there are pockets of resilience. The service sector hospitality, tourism, and professional services has recovered faster than expected, buoyed by pent-up demand and a rebound in travel. The labour market, while easing, remains relatively tight, with unemployment hovering just above 6 percent. Wage growth has softened but continues to run near 3 percent, roughly matching inflation and preventing a return to real-income declines. For the Bank of Canada, the task now is calibration rather than correction. After an aggressive tightening cycle between 2022 and 2024, which pushed the policy rate to 5 percent, the central bank has cautiously shifted toward a holding pattern and markets are speculating about when cuts will begin. The September uptick in inflation may have delayed that timeline. “They’ll be in no rush,” says Avery Shenfeld, chief economist at CIBC. “The Bank wants to see several months of consistent 2 percent-range inflation before pulling the trigger on rate reductions.” Still, pressure is building. Borrowers, from homeowners to small-business owners, are eager for relief. Federal and provincial governments face rising debt-service costs. A premature cut could risk reigniting inflation; a delay could push the economy closer to stagnation. It is, in Governor Tiff Macklem’s words, “a narrow path to soft landing.” Fiscal policy has little room to maneuver. Ottawa’s deficit remains high, and new spending commitments, from housing initiatives to climate-transition programs, are straining the federal balance sheet. The fall economic statement due in November 2025 is expected to emphasize restraint, though targeted tax incentives for investment and innovation may appear. Provincial governments face their own pressures. Ontario’s infrastructure ambitions and Alberta’s energy transition costs collide with the limits of provincial borrowing. Across the country, municipalities are pleading for more funding to expand affordable housing and transit networks, both crucial to restoring productivity and controlling inflationary housing costs. Meanwhile, the immigration recalibration announced earlier this year — tightening the inflow of temporary foreign workers and international students — is beginning to cool demand but also reduce the labour-supply growth that sustained GDP gains. Economists warn of a demographic “whiplash” if policy swings too sharply. Canada’s challenges are hardly unique. The U.S. economy, while still expanding, is also showing signs of fatigue. Global trade remains subdued, and geopolitical tensions from Europe, the Middle East to the South China Sea threaten to destabilize commodity markets. For a resource-exporting nation like Canada, volatility in oil and metals prices can quickly ripple through the national accounts. Yet Canada’s relative stability remains an asset. The banking system is sound, public institutions are trusted, and the inflation-targeting framework continues to anchor expectations. The Canadian dollar, while weaker against the U.S. greenback, has steadied after last year’s slide, helping exporters regain some competitiveness. Most forecasters expect 2026 to mark a modest turning point; a year of slow but steady recovery, provided global conditions hold. The Bank of Canada projects inflation converging toward 2 percent, with GDP growth inching higher as investment recovers and interest rates gradually decline. Still, the structural questions persist: How can Canada lift productivity? How can it make housing affordable again? And how can it ensure the next generation sees rising living standards, not just stable prices? The answers will not come from the central bank alone. They will require a mix of education reform, technology investment, infrastructure renewal, and immigration strategies that balance economic needs with social capacity. Without these, low inflation may be achieved, but prosperity will remain elusive. Canada has, in many respects, passed the inflation test. What lies ahead is the harder exam: restoring economic vitality. The numbers, 2.4 percent inflation, 1 percent growth, tell a story of stability on paper but stagnation in spirit. Whether policymakers can turn this “soft landing” into a genuine takeoff will define the next chapter of Canada’s economic story. Let’s see what the upcoming Liberal Government budget will produce. Hope for the best for the country.