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Canada is at crossroads. It’s facing a shifting relationship with its main economic partner, a reawakening to its forgotten growth potential, and questions about its place in a new and developing global supply chain. All of this is happening amidst a likely painful slowdown in growth in the coming year. And, landing into this maelstrom of economic change is a new government.

It’s too early to fully assess how a new government will impact Canada’s economy in the short and long term. Indeed, platforms are not the same as enacted policies.

As a starting point, however, we should begin with where the main economic challenges will be. Here are key areas worth highlighting.

1. The pressure of immediate needs imposed by a recessionary-type slowdown…

RBC Economics isn’t currently calling for a technical recession, but our outlook suggests it could still feel very much like one—essentially no growth for the remainder of this year and more job losses. Certain sectors such as autos, steel and aluminum among others, and regions like Ontario and Quebec will feel it more.

Meanwhile, we continue to see signs of greater pressure on low- and middle-income Canadians, who feel the weight of a larger price-level shock, the end of any excess savings and smaller real wage gains. Combined with a rise in joblessness, targeted federal support will be needed, and it won’t be particularly optional.

2. … while tackling Canada’s record-low structural weakness.

Meanwhile, fiscal policy will have to focus on reviving a sad economic development. Potential growth—a combination of labour force participation and productivity—is expected to fall below 1% at current rates.

This isn’t a new problem—potential has been declining for 65 years, much like in other advanced economies. But, as Bank of Canada Senior Deputy Governor Carolyn Rogers described in 2024, we are at a “break the glass” moment.

There’s no shortage of ways that falling potential could be addressed. The size and scope of the next chapter of immigration policies will matter, but so will addressing Canada’s productivity crisis, including lagging business investment relative to peer economies, and there’s no bad place to start on that one.

As we’ve covered here, from cutting red tape to reducing interprovincial trade barriers to generating innovation, there’s a laundry list of approaches that could work. But, the key will be a parallel focus on short-term and long- term needs.

3. The best treatment for what ails Canada is fiscal policy, not monetary.

For Canada’s short-term and long-term challenges, fiscal policy at federal and provincial levels are a better prescription for what ails Canada than long relied upon monetary policy.

In the near term, the BoC might have a few more interest rate cuts in its toolbox to soften some of the broad-based slowdown ahead, but the segmented nature of the impact likely means there are pockets needing much more support than others. Monetary policy can’t target the areas most in need and risks inflation by being too supportive to some segments of the economy and not helpful enough to others.

Longer-term challenges of promoting investment, deregulation and a more competitive ecosphere fit squarely with governments, with the feds in the lead. In other words, there are no other appropriate lifeboats.

4. Rebalancing of focus between social and business investment measures.

In recent years, Canadians have benefited from a permanent expansion in federal government spending on often broad-based social programs without absorbing the costs. Some of these programs may “pay for themselves” over time by encouraging greater economic growth, but current costs have been deficit-financed. Now, the feds have a new laundry list of “to-dos,” and fiscal space is not unlimited.

Affordability and other social challenges remain very real concerns, but the need to encourage greater wealth drivers in the Canadian economy amid shifting economic and geopolitical forces necessitates a reset. Business investment will be at the forefront of rebuilding the economy—preventing a backslide amid uncertainty and reversing its underperformance is key.

Addressing this won’t just be about spending through tax measures, incentives or public infrastructure. In some places, it’s about pulling government influence back through deregulation, removing red tape or finding efficiencies like through a streamlined tax code.

5. Finding ways to make social and other ‘must do’ spending more growth positive.

There is a bunch of significant government spending hovering in the near and medium term, including on housing, defence and healthcare.

Both housing and healthcare have lower than average labour productivity—meaning they risk tying up a lot of the economy’s resources. In a recession with idle resources, it can be a good thing. But otherwise, this “crowding out” could make growing the economy in other areas more difficult. In the longer term, some areas may not generate a lot of additional economic growth. Defence spending, for example, will accumulate some idle (deterrent) assets—if we’re lucky.

Canada does not need to choose between growth and this type of spending, which is absolutely needed. It can just try to do better. Public spending in these areas can encourage innovation, dual-use applications, ties into other areas of the economy, or links to export opportunities. We’ll be following up with more on this soon.

6. Fiscal space is not unlimited, but it can buffer the economy in a tariff shock and take on some growth-positive spending.

The slow growth environment we’re currently projecting would not require significant federal stimulus, but a major tariff shock such as 25% permanent tariffs—a downside scenario we were seriously contemplating a month ago—would require a much bigger fiscal lift. We previously wrote that as much as $145 billion could be needed over two years, which would send the federal debt-to-gross domestic product ratio to COVID-19 highs.

As debt buyers, investors are the ultimate arbiters of fiscal sustainability, and they tend to look at countries on a relative basis. Even though Canada’s consolidated government gross debt is high relative to other triple A-rated peers, its net debt is much lower and the lowest in the G7. Government support through a potential recession is expected by markets and should not raise red flags provided it is targeted and sized appropriately.

The government should also have capacity for some other spending. Canada is not the only country facing shifting trade winds, and with pervasive uncertainty weighing on businesses, the public sector will need to play a role in making the economy more resilient. But a lot is being asked of the public purse.

The more each dollar of public spending delivers greater growth dividends, the more the Canadian economy will be headed in the right direction, while the federal debt burden remains sustainable.

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Frances Donald is the Chief Economist at RBC and oversees a team of leading professionals, who deliver economic analyses and insights to inform RBC clients around the globe. Frances is a key expert on economic issues and is highly sought after by clients, government leaders, policy makers, and media in the U.S. and Canada.

Cynthia Leach is Assistant Chief Economist at RBC covering the team’s structural economic and policy analysis. She joined in 2020.