## 1. Exchange Rate Pass-Through in Canada ## Source details **Canonical URL:** [1. Exchange Rate Pass-Through in Canada](https://www.imf.org/-/media/files/publications/cr/2026/english/1canea2026001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1canea2026001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1canea2026001.pdf.json) --- ### Context and recent shock - U.S. tariff increases on steel, aluminum, autos, energy, and lumber and Canada’s more limited and largely unwound retaliatory measures disrupted integrated supply chains, raised exporter costs, and hit trade-exposed sectors hardest. - USMCA/CUSMA exemptions continue to shelter most bilateral trade, but elevated policy uncertainty has weighed on business investment and activity in manufacturing and resource-linked sectors. - Authorities’ near-term responses included monetary easing, temporary firm-level support (Annex I), and investment-supporting measures in Budget 2025; these cushioned the near-term impact but did not close the broader competitiveness gap. - Tariff shock compounds existing structural headwinds: lower commodity prices, softer external demand, slowing immigration, and longstanding weaknesses in productivity, capital deepening, and business investment. - The Carney administration is advancing reforms aimed at lowering structural barriers to investment and innovation. ### Recent economic outcomes and key indicators - Activity - Exports front-loaded briefly then adjusted sharply in mid-2025 as renewed U.S. tariff hikes (and some Chinese tariffs) took effect; exports fell back, investment slowed, and manufacturing, transportation, and other supply-chain-linked sectors contracted. - Q3:2025 outturns showed a steep drop in imports as investment momentum stayed weak. - Inflation - Headline CPI hovered just above 2 percent in the second half of 2025. - Core measures remained in the 2½–3 percent range. - Tariffs have had limited pass-through to domestic prices so far. - Monetary stance - Bank of Canada reduced the policy rate to 2¼ percent in October, bringing it to the lower end of the estimated neutral range. - Labor market - Unemployment rate rose after the tariff shock but returned close to pre-tariff level (about 6½ percent). - Declining vacancy rates and higher unemployed-to-vacancy ratio indicate easing labor demand versus 2022–23. - Nominal wage growth eased into the mid-3 percent range. - Slower inflows of temporary foreign workers tightened labor supply in selected sectors (notably agriculture and hospitality). - External sector and capital flows - Current account deficit widened in 2025 as exports declined, notably goods exports to the United States (energy and other commodities) and some manufacturing. - Export volumes later steadied, import growth softened, and terms of trade improved. - Portfolio flows were volatile; net resident investment abroad offset periods of inflows. - Foreign direct investment recorded resilient net inflows concentrated in trade and transportation, finance and insurance, and manufacturing. - Fiscal - 12-month cumulative general government deficit reached about 1.3 percent of GDP through Q3:2025, compared with 1.9 percent of GDP a year earlier (when spending was elevated by one-off measures amounting to around 0.8 percent of GDP). - Structural balance expected to remain broadly unchanged at about ¾ percent of GDP in 2025 relative to 2024. - Recent support driven by middle-income tax cuts (about 0.1 percent of GDP), repeal of the consumer carbon tax, and higher public investment. - Financial stability and nonbank sectors - Banks maintain strong credit quality; nonperforming loans below 0.6 percent. - Capital and liquidity buffers well above regulatory minima; Domestic Stability Buffer at 3.5 percent of risk-weighted assets. - Nonbank financial institutions grew rapidly (about 12 percent y/y in 2024) and appear well capitalized; FSAP stress tests confirm resilience of banks and NBFIs to severe solvency and liquidity shocks. - Risks: elevated household debt and debt-service burdens, material CRE exposures at pension funds and insurers, banks’ indirect CRE exposures, and rising small-business bankruptcies in trade-exposed sectors. ### Counterfactuals and measurement - Counterfactual analysis comparing actual outcomes to a no-tariff/no-retaliation scenario indicates that, absent the tariff shock, output would have been higher, inflation modestly firmer, and the trade balance stronger through 2025. - The no-tariff scenario holds broader global conditions constant and isolates tariff impacts through trade and financial linkages. ### Outlook and risks - Baseline assumptions - Prevailing tariffs act chiefly as a negative demand shock through 2026. - Baseline reflects current tariff settings (consistent with January 2026 WEO assumptions), lower immigration inflows under the 2025–27 Immigration Levels Plan, and a measured rollout of fiscal support starting in late 2025. - Potential growth is estimated at just above 1½ percent (does not yet fully incorporate prospective productivity gains). - Baseline projections and expectations - Real GDP: Projected to grow modestly over coming quarters, supported by policy easing, but to remain below potential for some time before gradually converging toward trend. Structural fiscal deficit projected to widen and peak at around 2 percent of GDP in 2026. - Inflation: CPI inflation expected to hover near 2 percent as output remains below potential and softer labor demand keeps wage pressures moderate; exchange rate pass-through expected to be limited. - Current account: Expected to remain weak in the near term, then improve gradually as trade headwinds ease and supply-side reforms take effect; current account deficit expected to widen temporarily before narrowing. - Risks - Downside: renewed tariff escalation, tighter global financial conditions (including from disorderly asset price corrections), sharper slowdown in China, household debt vulnerabilities, extreme climate events. - Upside: more constructive trade environment, faster internal market integration, stronger execution of supply-side reforms and priority infrastructure investment. - Authorities’ views - Growth expected to remain subdued near-term; Bank of Canada projects growth near potential (about 1½ percent) in 2026–27 and inflation near 2 percent. - Main external risks: continued/additional U.S. tariff actions or uncertainty around USMCA review; upside from faster business adjustment and reforms. ### Policy discussions and recommendations - Overarching priority - Manage trade-induced headwinds while advancing reforms to raise productivity, strengthen resilience, and support economic security. Strategy anchored in openness and predictability, constructive 2026 USMCA review, and gradual diversification. - Monetary policy recommendations - Stay focused on maintaining inflation near target. Current stance (policy rate at 2¼ percent) is appropriate with inflation contained and the economy below potential. - Further easing could be considered if underlying inflation pressures continue to ease and slack widens, accounting for fiscal effects on demand and supply. - Continue steady-state balance sheet operations following the end of quantitative tightening to maintain stable settlement balances. - Communication: Continue reinforcing policy credibility and stability. Return to publishing a central forecast is welcomed. Carefully presented conditional policy rate paths under alternative scenarios could clarify the reaction function without implying pre-commitment. - Fiscal policy recommendations - Position: Appropriately supports near-term adjustment while anchoring medium-term sustainability. With public debt moderate by G7 standards and borrowing costs contained, Budget 2025 uses fiscal space to combine targeted near-term support with a shift toward higher public investment. - Staff simulations: A general government deficit of about 2–2½ percent of GDP in 2025–26, followed by gradual consolidation from 2027 toward around 1½ percent of GDP over the medium term, would balance stabilization and debt sustainability. - Priorities: Emphasize high-multiplier public investment—particularly shovel-ready infrastructure and housing—alongside temporary, targeted support for viable firms affected by trade disruption. New measures should be focused, transparent, time-bound, and linked to productivity-enhancing objectives. - Fiscal framework: As public investment scales up, adopt a clear debt-to-GDP anchor as central to the fiscal framework, supported by deficit and operating-balance paths as complementary operational guides. - Capital-budgeting and expenditure control - Definition of capital spending needs closer alignment with national accounts and GFS standards; clearer treatment of grants, tax expenditures, and intangible assets. - Strong discipline via clear eligibility, staged approvals, and central oversight. - Independent validation recommended: ex ante validation of classifications and ex post compliance checks. - Comprehensive expenditure reviews, Cabinet-led, with clear objectives and timely implementation beginning with the upcoming Main Estimates. - Financial stability and macroprudential guidance - Strengthen federal-provincial coordination and information-sharing arrangements; enhance supervisory autonomy and prudential oversight. - More frequent risk-based onsite inspections and timely enforcement with clearer sanctioning powers to strengthen AML/CFT framework. - Close data gaps on cross-border activities, expand system-wide stress testing, and deepen federal–provincial coordination for NBFIs. - Maintain focus on housing-related vulnerabilities; borrower-based measures remain important; consider further tightening for higher-risk segments if risks intensify. - Extend Domestic Stability Buffer to all systemically important institutions; consider a positive neutral CCyB for other deposit-taking institutions over the medium term. - Housing policy priorities - Supply expansion: ease land availability constraints, shorten permitting, address infrastructure gaps, raise construction-sector productivity; CMHC estimates structural supply shortfall of about 2½ million units by 2035. - Demand management: tightly targeted measures; cautious use of first-time buyer supports; replace foreign-buyer restrictions and nonresident taxes over time with broad-based, non-discriminatory taxes on speculative activity. - Productivity and competitiveness reforms - Address broad-based productivity shortfalls: output per hour worked roughly 30 percent lower than in the United States. - Strengthen business dynamism: reverse decline in firm entry (share of young firms in output fell from about 30 to 20 percent). - Tackle market power: a 1 percent increase in markups linked to about a 0.4 percent decline in subsequent productivity growth. - Policy actions: expand Competition Bureau’s mandate, sustain resourcing, lower licensing barriers, harmonize regulatory standards, expand private enforcement, and screen new regulations for competition impacts. - Coordinated agenda: (i) high-quality public investment; (ii) innovation policies; (iii) labor market and immigration policies to support reallocation; (iv) competition-enhancing reforms. - Industrial policy guidance - Broad-based measures (expanded EI, BDC liquidity support, reskilling, trade promotion) preferred; selective measures only where clear market failures demonstrated. - Selective instruments should be narrow, time-bound, competitively neutral, and conditional on firm viability, with transparent evaluation and attention to spillovers. - Trade policy - Maintain openness and predictability; diversify gradually toward Europe and the Indo-Pacific while deepening North American integration. - 2026 USMCA review is pivotal to update rules on critical minerals, digital trade, and clean technologies. ### Box 1 — Exchange Rate Pass-Through: key findings and methodology - Focus: how exchange rate movements transmit to import and consumer prices in Canada. - Principal finding: Exchange rate pass-through (ERPT) is shock dependent; magnitude and sign vary with source and persistence of exchange rate movements. - Behavioral insight: Firms adjust pricing by shock type: - demand-driven appreciations can raise prices through markup expansion; - monetary policy-driven appreciations tend to compress margins. - Model framework: structural VAR with sign and zero restrictions estimated with Bayesian methods on Canadian quarterly data from 1997Q1–2019Q4. - Results highlights - Depreciations driven by domestic monetary easing generate the strongest pass-through to consumer prices. - Supply or exogenous exchange rate shocks generate more muted effects. - Demand-driven depreciations are associated with price declines as firms compress margins. - Variance decompositions: global and domestic demand shocks account for most exchange rate movements. - Definition: Pass-through is the median ratio of cumulative impulse responses of consumer prices to exchange rate movements. - Prepared by Flora Lutz (RES). ### Box 2 — Model-Based assessment of tariff shocks: methodology and policy takeaways - Model: small open-economy structural model calibrated to Canada with explicit fiscal block; simulation starts from end-2024 conditions. - Shock: a sustained 5 percent increase in foreign prices of Canadian exports, reducing external demand and widening the output gap. - Monetary policy easing alone: under a simple-rule framework rates would ease by about 100 basis points, supporting consumption and investment; output and trade balance recover only gradually. - Countercyclical fiscal response: temporary fiscal support alongside accommodative monetary policy yields stronger stabilization; inflation peaks at about 2¼ percent in the simulated response and debt dynamics are smoother. - Bottom line: A countercyclical policy mix—temporary, well-anchored fiscal support alongside accommodative monetary policy—delivers stronger stabilization while preserving price stability and fiscal credibility. ### Annex I — Government Support Measures (selected with numeric values preserved) - Immediate Relief Measures for Workers - Employment Insurance for Long-Tenured Workers: 20 extra weeks up to a maximum of 65 weeks; expected to support about 190,000 long-tenured workers. Amount/Cost: C$1.6 billion over 5 years. - Suspend rules on separation payments so workers can keep severance while receiving EI. Amount/Cost: C$424 million over 2 years. - Waive one-week waiting period supporting an additional 700,000 claimants. Amount/Cost: C$418 million over 2 years. - Liquidity Relief for Firms - BDC SME loan cap increase from C$2 to C$5 million per business. - Large Enterprise Tariff Loan Facility: loan size of > C$60 million; about C$500 million in funding under the facility. - Advance Payments Program: interest-free limit for canola producers increased from $250K to $500K; $500,000 per producer cap for 16 months. - Other industrial and demand measures - Strategic Response Fund: C$5 billion. - Regional Tariff Response Initiative: expanded to C$1 billion over 3 years (from $450 million), non-repayable contributions up to $1 million per business. - Biofuel Production Incentive: Over $370 million over 2 years (2026/01-2027/12). - Buy Canadian Policy: extendable procurement mandate reaching additional $70 billion in spending (not quantified). - Targeted measures for steel and lumber - Tighten tariff rate quota levels and impose a global 25% tariff on targeted imported steel-derivative products. - Cut interprovincial freight rates for Canadian steel and lumber by 50%, beginning in Spring 2026. - Build Canada Homes to prioritize shovel-ready projects that use Canadian wood products (begin within 12 months). - Canadian Forest Sector Transformation Task Force: Amount/Cost: C$50 million over five years. - Additional funding and demand impacts cited: - unlock over C$1 billion in new domestic demand for Canadian steel; - funding allocation of roughly C$700 million next year, creating C$70 to C$140 million of new demand for Canadian wood products; - Over C$100 million over two years; - An additional C$500 million to the BDC Softwood Lumber Guarantee Program. ### Annex III — Debt coverage, baseline projections, and risk analysis (selected numeric series preserved) - Chosen consolidated perimeter: general government consolidated level (federal, provincial and territorial, local governments, and social security funds). - Baseline public debt (percent of GDP) - 2024: 110.0 - 2025: 110.6 - 2026: 110.9 - 2027: 109.8 - 2028: 108.0 - 2029: 106.3 - 2030: 104.3 - 2031: 102.4 - 2032: 100.4 - 2033: 98.5 - 2034: 96.6 - Change in public debt - 2024: 5.0 - 2025: 0.6 - 2026: 0.3 - 2027: -1.1 - 2028: -1.7 - 2029: -1.8 - 2030: -1.9 - 2031: -2.0 - 2032: -2.0 - 2033: -1.9 - 2034: -1.9 - Contribution of identified flows (selected) - Primary balance: 2.1 1.6 2.2 1.8 1.4 1.3 1.0 1.0 1.0 1.1 1.2 - Noninterest revenues: 38.8 38.7 38.6 38.6 38.6 38.6 38.6 38.7 38.7 38.7 38.7 - Noninterest expenditures: 40.9 40.3 40.8 40.5 40.0 39.8 39.6 39.7 39.7 39.8 39.9 - Real GDP growth (percent, memo): 2.0 1.6 1.6 1.9 1.7 1.7 1.7 1.7 1.7 1.7 1.7 - Inflation (GDP deflator; percent, memo): 2.7 2.6 2.5 2.3 2.2 2.1 2.1 2.1 2.1 2.1 2.1 - Gross financing needs: 18.5 20.0 22.2 22.9 20.4 21.7 24.1 22.3 21.2 21.4 22.4 - Risk metrics and signals - Debt fanchart width: 47.9 0.7 - Probability of debt non-stabilization (percent): 68.0 0.6 - Terminal debt-to-GDP x: 18.4 0.4 - Debt fanchart index (DFI): 1.7 — Risk signal (DFI): "Moderate" - GFN financeability index (GFI): 9.5 — Risk signal (GFI): "Moderate" - Prob. of missed crisis, 2025-2030: 18.2 pct. - Prob. of false alarms, 2025-2030: 36.4 pct. ### Data issues and priorities (Annex VI) - Data adequacy assessment (selected) - National Accounts: A - Prices: A - Government Finance Statistics: A - External Sector Statistics: A - Monetary and Financial Statistics: B - Inter-sectoral Consistency: A - Principal data gaps and priorities - Timeliness: central government operations disseminated monthly within 60 instead of 30 days. - MFS coverage and granularity: enhance breakdowns for NBFIs and other depository corporations by instrument, currency, and counterparty. - Resume balance sheet data reporting for other depository corporations (2SR) and other financial institutions (4SR). - Strengthen data on housing supply constraints (zoning, permitting, land banking, development charges). - Improve recording of departures of temporary workers. - Canada adheres to SDDS Plus since April 2017. *Source: IMF staff summary of "1. Exchange Rate Pass-Through in Canada" (Content unit: 1canea2026001).* ### 1. Exchange Rate Pass-Through in Canada _______________________________________________________ 24 ### 1. Exchange Rate Pass-Through in Canada ### Context and recent shock - U.S. tariff increases on steel, aluminum, autos, energy, and lumber and Canada’s more limited and largely unwound retaliatory measures disrupted integrated supply chains, raised exporter costs, and hit trade-exposed sectors hardest. - USMCA/CUSMA exemptions continue to shelter most bilateral trade, but elevated policy uncertainty has weighed on business investment and activity in manufacturing and resource-linked sectors. - Authorities’ near-term responses included monetary easing, temporary firm-level support (Annex I), and investment-supporting measures in Budget 2025; these cushioned the near-term impact but did not close the broader competitiveness gap. - Tariff shock compounds existing structural headwinds: lower commodity prices, softer external demand, slowing immigration, and longstanding weaknesses in productivity, capital deepening, and business investment. - The Carney administration is advancing reforms aimed at lowering structural barriers to investment and innovation. ### Recent economic outcomes and key indicators - Activity: Exports front-loaded briefly then adjusted sharply in mid-2025 as renewed U.S. tariff hikes (and some Chinese tariffs) took effect; exports fell back, investment slowed, and manufacturing, transportation, and other supply-chain-linked sectors contracted. Q3:2025 outturns showed a steep drop in imports as investment momentum stayed weak. - Inflation: - Headline CPI hovered just above 2 percent in the second half of 2025. - Core measures remained in the 2½–3 percent range. - Tariffs have had limited pass-through to domestic prices so far. - Monetary stance: Bank of Canada reduced the policy rate to 2¼ percent in October, bringing it to the lower end of the estimated neutral range. - Labor market: - Unemployment rate rose after the tariff shock but returned close to pre-tariff level (about 6½ percent). - Declining vacancy rates and higher unemployed-to-vacancy ratio indicate easing labor demand versus 2022–23. - Nominal wage growth eased into the mid-3 percent range. - Slower inflows of temporary foreign workers tightened labor supply in selected sectors (notably agriculture and hospitality). - External sector and capital flows: - Current account deficit widened in 2025 as exports declined, notably goods exports to the United States (energy and other commodities) and some manufacturing. - Export volumes later steadied, import growth softened, and terms of trade improved. - Portfolio flows were volatile; net resident investment abroad offset periods of inflows. Foreign direct investment recorded resilient net inflows concentrated in trade and transportation, finance and insurance, and manufacturing. - Fiscal: - 12-month cumulative general government deficit reached about 1.3 percent of GDP through Q3:2025, compared with 1.9 percent of GDP a year earlier (when spending was elevated by one-off measures amounting to around 0.8 percent of GDP). - Structural balance expected to remain broadly unchanged at about ¾ percent of GDP in 2025 relative to 2024. - Recent support driven by middle-income tax cuts (about 0.1 percent of GDP), repeal of the consumer carbon tax, and higher public investment. - Financial stability and nonbank sectors: - Banks maintain strong credit quality; nonperforming loans below 0.6 percent. - Capital and liquidity buffers well above regulatory minima; Domestic Stability Buffer at 3.5 percent of risk-weighted assets. - Nonbank financial institutions grew rapidly (about 12 percent y/y in 2024) and appear well capitalized; FSAP stress tests confirm resilience of banks and NBFIs to severe solvency and liquidity shocks. - Risks: elevated household debt and debt-service burdens, material CRE exposures at pension funds and insurers, banks’ indirect CRE exposures, and rising small-business bankruptcies in trade-exposed sectors. ### Counterfactuals and measurement - Counterfactual analysis comparing actual outcomes to a no-tariff/no-retaliation scenario indicates that, absent the tariff shock, output would have been higher, inflation modestly firmer, and the trade balance stronger through 2025. - The no-tariff scenario holds broader global conditions constant and isolates tariff impacts through trade and financial linkages. ### Outlook and risks - Baseline assumptions: - Prevailing tariffs act chiefly as a negative demand shock through 2026. - Baseline reflects current tariff settings (consistent with January 2026 WEO assumptions), lower immigration inflows under the 2025–27 Immigration Levels Plan, and a measured rollout of fiscal support starting in late 2025. - Potential growth is estimated at just above 1½ percent (does not yet fully incorporate prospective productivity gains). - Baseline projections and expectations: - Real GDP: Projected to grow modestly over coming quarters, supported by policy easing, but to remain below potential for some time before gradually converging toward trend. Structural fiscal deficit projected to widen and peak at around 2 percent of GDP in 2026. - Inflation: CPI inflation expected to hover near 2 percent as output remains below potential and softer labor demand keeps wage pressures moderate; exchange rate pass-through expected to be limited. - Current account: Expected to remain weak in the near term, then improve gradually as trade headwinds ease and supply-side reforms take effect; current account deficit expected to widen temporarily before narrowing. - Risks: - Downside: renewed tariff escalation, tighter global financial conditions (including from disorderly asset price corrections), sharper slowdown in China, household debt vulnerabilities, extreme climate events. - Upside: more constructive trade environment, faster internal market integration, stronger execution of supply-side reforms and priority infrastructure investment. - Authorities’ views: Growth expected to remain subdued near-term; Bank of Canada projects growth near potential (about 1½ percent) in 2026–27 and inflation near 2 percent. Main external risks: continued/additional U.S. tariff actions or uncertainty around USMCA review; upside from faster business adjustment and reforms. ### Policy discussions and recommendations - Overarching priority: Manage trade-induced headwinds while advancing reforms to raise productivity, strengthen resilience, and support economic security. Strategy anchored in openness and predictability, constructive 2026 USMCA review, and gradual diversification. - Monetary policy: - Stay focused on maintaining inflation near target. Current stance (policy rate at 2¼ percent) is appropriate with inflation contained and the economy below potential. - Further easing could be considered if underlying inflation pressures continue to ease and slack widens, accounting for fiscal effects on demand and supply. - Continue steady-state balance sheet operations following the end of quantitative tightening to maintain stable settlement balances. - Communication: Continue reinforcing policy credibility and stability. Return to publishing a central forecast is welcomed. Carefully presented conditional policy rate paths under alternative scenarios could clarify the reaction function without implying pre-commitment. - Fiscal policy: - Position: Appropriately supports near-term adjustment while anchoring medium-term sustainability. With public debt moderate by G7 standards and borrowing costs contained, Budget 2025 uses fiscal space to combine targeted near-term support with a shift toward higher public investment. - Staff simulations: A general government deficit of about 2–2½ percent of GDP in 2025–26, followed by gradual consolidation from 2027 toward around 1½ percent of GDP over the medium term, would balance stabilization and debt sustainability. - Priorities: Emphasize high-multiplier public investment—particularly shovel-ready infrastructure and housing—alongside temporary, targeted support for viable firms affected by trade disruption. New measures should be focused, transparent, time-bound, and linked to productivity-enhancing objectives. - Fiscal framework: As public investment scales up, adopt a clear debt-to-GDP anchor as central to the fiscal framework, supported by deficit and operating-balance paths as complementary operational guides, to reinforce accountability and ensure scaled-up investment remains sustainable and credible. *Source: IMF staff summary of "1. Exchange Rate Pass-Through in Canada" (Content unit: 1canea2026001).* ### 18. The new capital-budgeting framework is a welcome step toward sharpening the focus ### 18. The new capital-budgeting framework is a welcome step toward sharpening the focus ### Capital-budgeting framework: findings and recommendations - The definition of capital spending remains broad—spanning public investment and measures affecting private capital formation—pointing to need for closer alignment with national accounts and GFS standards and clearer treatment of grants, tax expenditures, and intangible assets. - A clearer bridge to standard statistical classifications would strengthen transparency, comparability, and the link between borrowing and the debt path. - Strong discipline is needed via: - clear eligibility, - staged approvals, and - central oversight to ensure scaled-up investment delivers durable productivity gains. - International experience, including in the United Kingdom, shows capital-budgeting works best when anchored by a clear debt target. - Independent validation is recommended: - ex ante validation of classifications, and - ex post compliance checks to bolster accountability and credibility. ### Expenditure control and contingency planning - Effective expenditure control is critical to sustaining the shift toward higher public investment. - Comprehensive expenditure reviews are an important step, including centrally governed, Cabinet-led review. - Clear objectives, transparent reporting, and timely implementation—beginning with the upcoming Main Estimates—are essential to reinforce discipline and accountability. - Contingency planning and state-contingent policymaking are emphasized given elevated uncertainty. ### Risk scenarios and policy responses (modeling basis noted) - Staff analyze two illustrative risk scenarios drawing on assumptions from the October 2025 WEO and the latest Bank of Canada Monetary Policy Reports, using a small open-economy DSGE model calibrated to Canadian data. - Downside scenario and policy response: - Real GDP about ¾ percent below baseline by Q3:2026. - Inflation effects likely limited as tariffs operate primarily through demand with modest pass-through to prices. - Fiscal policy would provide primary stabilization response: - allowing automatic stabilizers to operate fully; and - if needed, deploying slightly larger (around ¼ percent of GDP, text charts), temporary and targeted support for viable trade-exposed firms and vulnerable households. - Measures should be time-bound, transparently communicated, and paired with a credible path back to fiscal anchors as conditions normalize. - Monetary policy: remain attentive to incoming evidence on tariff effects and labor market dynamics; further easing warranted only if underlying disinflationary pressures persist. - Upside scenario and policy response: - If trade frictions ease faster than expected and uncertainty dissipates, demand would strengthen more rapidly, warranting timely withdrawal of policy support. - Fiscal policy would pivot earlier toward consolidation while preserving investment in productivity, infrastructure, and housing. ### Authorities’ views on macro policy - Bank of Canada: - judged current monetary stance appropriate, with easing beginning to support interest-sensitive activity. - monetary policy will remain data-driven, with a risk-based and symmetric reaction function, clear communication, and no pre-commitment. - Fiscal authorities: - Canada’s fiscal position remains strong by G7 standards, underpinned by a low net debt-to -GDP ratio and sustained investor confidence, allowing fiscal policy to play a stabilizing role amid elevated trade uncertainty. - Budget 2025 reflects targeted, temporary near-term support and a shift toward higher public investment. - Fiscal discipline anchored by new operating-balance and deficit anchors, with debt-to-GDP closely monitored and publicly reported. - Achieving the operating-balance objective will require sustained expenditure restraint and early progress under the multi-year expenditure review. - Elevated uncertainty further underscores importance of contingency planning. - On the new capital-budgeting framework: - It aims to strengthen quality, transparency, and credibility of public investment decisions. - Developed with expert feedback, intended to support—not relax—fiscal discipline and will evolve with implementation. - Clear classification and robust monitoring are essential as multi-year investment plans are rolled out. ### Preserving financial stability: assessment and recommendations - System resilience: - 2025 FSAP found banks and major NBFIs resilient to severe liquidity and solvency shocks; crisis-management and supervisory-coordination frameworks broadly strong. - Recommended targeted enhancements: - strengthen federal-provincial coordination and information-sharing arrangements; - enhance supervisory autonomy and prudential oversight; - more frequent risk-based onsite inspections, especially for banks and financial integrity risks; - timely enforcement backed by clearer sanctioning powers to strengthen AML/CFT framework. - Risks outside core banking system: - NBFIs growing in size and cross-border linkages. - Liquidity mismatches, leverage, and large U.S. hedge-fund positions in Canadian fixed-income and repo markets could amplify stress transmission during bouts of volatility. - Need stronger data collection on cross-border activities, expand system-wide stress testing, and deepen federal–provincial coordination. - Backstops and market reforms: - Bank of Canada’s contingent liquidity facility for NBFIs material to core funding markets is an important backstop. - Ongoing industry initiatives to broaden adoption of central clearing in fixed-income markets could further bolster resilience. - Macroprudential stance: - Focus remains on housing-related vulnerabilities. - Borrower-based measures—including the minimum qualifying rate and loan-to-value (LTV) limits—have tempered risks but high household debt and still-stretched valuations persist. - If housing-related risks intensify, further tightening of borrower-based limits—particularly for higher-risk segments—should balance default-risk reduction against near-term liquidity risks and possible migration toward nonbanks. - Recent steps to extend the Domestic Stability Buffer to all systemically important institutions are welcome. - Over the medium term, establishing a positive neutral countercyclical capital buffer (CCyB) for other deposit-taking institutions could further strengthen resilience, in line with FSAP recommendations. - Crypto and stablecoins: - Work progressing on regulatory approach to stablecoins and broader crypto-asset risks under the Bank of Canada’s Payments Act; cross-border crypto-asset risks remain contained. ### Housing affordability: diagnosis and policy priorities - Current conditions: - Housing affordability pressures remain acute in major cities despite some easing. - Softer labor market conditions and tighter federal immigration targets have moderated demand—particularly in Toronto and Vancouver—cooling rental and ownership markets. - Price growth has slowed; national prices edging down; residential construction relatively strong nationally but slowed in most supply-constrained urban centers. - Mortgage rate cuts and mild price corrections have improved affordability from its 2022 peak, yet conditions remain historically strained. - Structural supply shortfall estimated by CMHC at about 2½ million units by 2035. - Policy priorities: - Supply expansion: - Focus on easing binding supply constraints: land availability, lengthy permitting, infrastructure gaps, and low construction-sector productivity. - Programs include Build Canada Homes, the Housing Accelerator Fund, expanded CMHC financing, and the Canada Housing Infrastructure Fund—beginning to improve project pipelines. - In major metros, limited serviced land and high development charges continue to weigh on delivery. - Sustained zoning reform, faster approvals, and coordinated federal–provincial–municipal action are essential. - Demand management: - Demand measures should be tightly targeted. - Support for first-time homebuyers can help marginally but must be calibrated to avoid reigniting price pressures before supply expands meaningfully. - Federal foreign-buyer ban and provincial and municipal nonresident taxes constitute capital flow management measures under the IMF’s Institutional View and appear to have contributed only modestly to recent cooling. - Over time, replacing them with broad-based, non-discriminatory taxes on speculative activity would reduce distortions, simplify administration, and better redirect capital toward new supply rather than existing housing stock. ### Productivity slowdown and long-term growth: diagnosis and policy pillars - Scale of the challenge: - Labor productivity continues to lag peers; output per hour worked is now roughly 30 percent lower than in the United States, with the gap having widened over time. - Productivity shortfalls are broad-based and particularly pronounced in technology and service sectors. - Drivers: - Business dynamism: - Firm-level evidence shows a steady decline in entry since 2000, with the share of young firms in output falling from about 30 to 20 percent. - New entrants start with wider productivity gaps relative to incumbents and scale more slowly. - Market power: - Industrial concentration has risen in around half of industries—particularly in mature service sectors such as retail, finance, and transportation—and markups have increased mainly among top firms. - A 1 percent increase in markups is linked to about a 0.4 percent decline in subsequent productivity growth. - Limited turnover at the top suggests entrenched incumbents and fewer disruptive entrants. - Policy responses to strengthen competition and dynamism: - Expand Competition Bureau’s mandate, sustain resourcing and enforcement. - Lower barriers through simpler licensing, clearer and more harmonized regulatory standards, and reduced burdens on smaller and newer firms. - Expand private enforcement before the Competition Tribunal and routinely screen new regulations for competition impacts. - Coordinated reform agenda priorities: - (i) high-quality public investment in infrastructure, skills, and research, anchored in fiscal discipline; - (ii) innovation policies combining predictable incentives with stronger education and research capacity; - (iii) labor market and immigration policies supporting reallocation through training and credential recognition; - (iv) competition-enhancing reforms including reduced internal trade barriers, improved access to venture capital, and modernized regulation. ### Fiscal strategy to support medium-term growth - Fiscal policy can support productivity and higher economic capacity through scaled-up well-targeted public investment, anchored in credible medium-term discipline. - Efficiency and revenue measures: - Stronger spending and revenue efficiency needed, including rigorous expenditure reviews and rationalization of large income-tax expenditures. - Gradual broadening of the GST/HST base recommended to improve efficiency and preserve fiscal space for high-return priorities—particularly research, skills, and digital infrastructure—while reinforcing the fiscal framework. - Priority investment and tax measures: - Public investment and infrastructure: - Budget 2025 scales up investment in clean electricity and trade-enabling infrastructure—including transport corridors, ports, and grid upgrades—to lower logistics costs, strengthen resilience, and support competitiveness. - Delivery risks: permitting delays, coordination gaps, and skilled labor constraints. - Recommendations: stronger project readiness, sequencing, and intergovernmental coordination; modular housing to ease labor-mobility constraints; emphasize efficiency and value for money in defense procurement. - Innovation, research, and skills: - Enhanced SR&ED support and advances in Major Projects initiatives expected to strengthen research infrastructure and accelerate clean-energy and critical-minerals development. - Targeted funding for AI and clean-technology platforms and the Venture and Growth Capital Catalyst Initiative can crowd in private investment, though clearer eligibility and disbursement rules would improve predictability. - Staff analysis suggests reallocating part of R&D support toward advanced education and research infrastructure—expanding pool of scientists and engineers—would yield larger productivity gains. - International experience highlights importance of stable, multi-year incentives combined with evaluation. - Financial innovation and competition: - Legislation on fiat-backed stablecoins under Bank of Canada oversight and continued rollout of the Consumer-Driven Banking Framework will expand secure data sharing and enable new business models. - Easing entry and streamlining regulation would support choice, competition, and capital deployment. - Pro-investment taxation: - The federal corporate tax rate remains internationally competitive. - The Productivity Super-Deduction and Accelerated Investment Incentive reduce the marginal effective tax rate on new capital by over two percentage points, reinforcing Canada’s position as one of the most tax-competitive G7 jurisdictions for new business investment. - To sustain impact, the tax system should remain simple and broad-based, supported by transparent evaluation of major tax expenditures. *Source: IMF staff chapter text.* ### 38. While industrial policy can support resilience and economic security, its effectiveness ### While industrial policy can support resilience and economic security, its effectiveness ### Industrial policy: scope, guardrails, and recommended design - Broad-based measures reduce frictions and ease factor reallocation rather than shielding sectors; examples noted: - expanded employment-insurance benefits - liquidity support through BDC and the Large Enterprise Tariff Loan Facility - reskilling programs - enhanced trade promotion - Broad-based measures should be: - temporary and transparent - focused on easing reallocation - More selective instruments carry higher risks and should be used only where clear market failures are demonstrated. Examples cited: - Strategic Response Fund - Regional Tariff Response Initiative - biofuel production incentives - Buy Canadian procurement mandates - temporary regulatory easing for automakers - Selective measures should be: - narrow, time-bound, and competitively neutral - supported by transparent design and evaluation - mindful of spillovers - conditional on firm viability to allow uncompetitive activities to exit and resources to reallocate ### Making immigration a force multiplier - Immigration policy central to expanding labor supply, research capacity, and innovation ecosystem. - Existing foundations highlighted: - Global Talent Stream - Mitacs - Further gains require: - closer integration of immigration, education, and innovation policies - strengthened mutual recognition of professional credentials across provinces (¶42) - Targeted shortages where faster reallocation of skilled workers is needed: health care, digital services, and advanced manufacturing. ### Deregulating internal trade and labor services - Internal market fragmentation stems from differences in standards, licensing and credential recognition, procurement rules, and marketing regulations, creating de facto internal borders. - Staff estimates of frictions: - equivalent to an average ad valorem tariff of about 9 percent - barriers particularly high in services—often exceeding 50 percent in sectors such as health, education, and retail (Box 6) - Smaller and more remote provinces affected disproportionately by constrained market size and labor mobility. - Potential gains from full elimination of non-geographic internal trade barriers: - could raise real GDP by up to 7 percent over time - services liberalization accounts for roughly 90 percent of the total impact - halving internal trade costs could broadly offset the GDP impact of a 10-percentage-point increase in U.S. tariffs - Priorities for implementation (provincial binding constraint despite federal frameworks in place): - completing mutual recognition of professional credentials—particularly in construction, health care, and education - phasing out local-preference procurement policies in line with CFTA disciplines - mutually recognizing safety and inspection certifications - publishing regular estimates of GDP and productivity gains from liberalization to strengthen accountability ### Trade policy and trade diversification - Strategy should remain anchored in openness and predictability, balancing diversification with deep North American integration. - Where trade or investment measures are taken for national or economic security reasons, they should be narrowly targeted and time-bound to limit spillovers. - Diversification toward Europe and the Indo-Pacific can strengthen resilience but will be gradual due to tightly integrated continental supply chains and infrastructure. - The 2026 USMCA review is pivotal: updating rules on critical minerals, digital trade, and clean technologies within a stable, rules-based framework would enhance regional competitiveness and investment certainty. - Deeper continental integration should complement broader market access; trade facilitation and enabling infrastructure support productivity, resilience, and economic security. ### Authorities’ views and recent policy orientation - Authorities concur that boosting productivity and competitiveness is central to medium-term growth with strong social mandate. - Budget 2025 measures highlighted: - Productivity Super-Deduction - Accelerated Investment Incentive - reduce the marginal effective tax rate on new investment to the lowest in the G7 - described as broad-based, time-bound, with sunset provisions - Fiscal capacity and credibility emphasized: - low net debt by G7 standards and sustained investor confidence - pivot toward housing-enabling infrastructure, clean electricity, trade corridors, nation-building projects - emerging energy-security and competitiveness strategy supported by federal–Alberta alignment - Microeconomic and productivity-enhancing priorities: - enhanced and more predictable SR&ED support - investments in research infrastructure, AI capabilities, and clean-technology platforms - Venture and Growth Capital Catalyst Initiative to strengthen commercialization - need for faster diffusion and business adoption of AI, deeper pool of highly skilled talent, and progress on internal market integration (mutual recognition and removal of local-preference rules) - Industrial policy stance: - targeted tools to support adjustment, resilience, and economic security in a fragmented global environment - temporary support for steel and softwood sectors intended to manage trade disruptions, safeguard viable capacity, and facilitate adjustment, complemented by broad-based measures - industrial and defense-related initiatives to remain contestable, subject to clear guardrails, and regularly evaluated - Trade stance: - emphasis on openness and predictability alongside diversification and deep North American integration - new trade diversification strategy focused on the Indo-Pacific and beyond - Canada noted as the only G7 country with free trade agreements in force with all other G7 countries ### Staff appraisal: near-term outlook, risks, and policy recommendations - Recent context and adjustment: - Canada adjusting well to a significant external trade shock from U.S. tariff increases - shock less severe than initially feared due to USMCA exemptions, monetary easing, and targeted domestic support - shock reinforced longstanding structural weaknesses; priority is near-term adjustment while advancing productivity, competitiveness, and resilience within a credible macro-fiscal framework - Near-term outlook: - output expected to remain below potential for some time as trade adjustment and uncertainty continue to weigh on exports, investment, and labor markets, compounded by slower immigration - inflation projected to remain near 2 percent - current account deficit expected to narrow only gradually - Risks: - tilted to the downside: renewed tariff escalation, prolonged trade uncertainty, tighter global financial conditions, or a sharper slowdown in China - domestic vulnerability: elevated household leverage - upside risks: more constructive U.S. trade environment and stronger execution of internal market and supply-side reforms - Policy mix and fiscal guidance: - current monetary policy stance appropriate with scope to recalibrate if underlying inflation pressures ease and slack widens - fiscal policy providing targeted near-term support within a credible framework - keeping a federal government deficit around 2½ percent of GDP in FY2025–26, followed by gradual consolidation over the medium term, recommended to balance stabilization with sustainability - clear communication of policy contingencies recommended: temporary, targeted fiscal support if conditions weaken; earlier withdrawal if conditions improve; transparent paths back to anchors - Fiscal framework and public investment governance: - recommend clarifying the debt-to-GDP ratio as the primary fiscal anchor—supported by deficit and operating-balance paths as operational guides - refine capital-budgeting framework with a clear bridge to standard statistical classifications and independent validation - sustained, well-reported expenditure reviews essential - Financial system resilience and vulnerabilities: - system remains resilient consistent with the 2025 FSAP findings - recommended actions: close data gaps on nonbank financial institutions, broaden system-wide stress testing, strengthen supervisory coordination - extend the Domestic Stability Buffer to all systemically important deposit-taking institutions, maintain borrower-based measures, reinforce risk-based supervision - Housing and supply: - restoring housing affordability requires durable expansion of supply - federal measures focus on faster approvals, improved financing for rental and multi-unit construction, and infrastructure support - coordinated federal–provincial–municipal action to align zoning, permitting, infrastructure, and financing essential - over time, replace foreign-buyer restrictions and nonresident taxes with broad, non-discriminatory taxes on speculative activity in line with the IMF’s Institutional View - Competitiveness and productivity reform priorities: - address weak business dynamism, slow capital deepening, lagging innovation, declining firm entry, barriers to scaling, and high concentration in key service sectors - strengthen Competition Bureau enforcement, simplify and harmonize licensing and regulation, and systematically screen new regulations for competition effects - encourage investment and innovation via simple, broad-based, predictable policy design, transparent evaluation, deeper pool of scientists and engineers, and stronger commercialization pathways - consider options to broaden the GST/HST base over time to reinforce fiscal space while preserving medium-term sustainability - Industrial policy guidance reiterated: - priority on broad-based measures—liquidity support, reskilling, trade facilitation - selective interventions used sparingly to address clearly identified market failures - measures should be narrow, time-bound, competitively neutral, conditional on firm viability, with transparent evaluation and attention to spillovers - Trade strategy recommendation: - coherent trade strategy anchored in openness and predictability remains essential - diversification toward Europe and the Indo-Pacific advised but gradual given deep continental integration - modernize trade rules through the 2026 USMCA review - Institutional recommendation: - it is recommended that the next Article IV consultation with Canada take place on the standard 12-month cycle ### Box 1 — Exchange Rate Pass-Through in Canada: key findings and methodology - Focus: how exchange rate movements transmit to import and consumer prices in Canada. - Principal finding: Exchange rate pass-through (ERPT) is shock dependent; magnitude and sign vary with source and persistence of exchange rate movements. - Behavioral insight: Canadian firms adjust pricing strategies by shock type: - demand-driven appreciations can raise prices through markup expansion - monetary policy-driven appreciations tend to compress margins - Conditioning on commodity and trade shocks can materially alter estimated pass-through. - Model framework: - structural VAR with sign and zero restrictions, estimated using Bayesian methods on Canadian quarterly data from 1997Q1–2019Q4 - compares shock-specific impulse responses with reduced-form estimates - Results summarized: - Depreciations driven by domestic monetary easing generate the strongest pass-through to consumer prices because stronger domestic demand and easier financial conditions allow firms to raise prices rather than absorb cost increases through margins - Supply or exogenous exchange rate shocks generate more muted effects, as cost pressures are partly offset by competitive forces and adjustment along supply chains - Demand-driven depreciations are associated with price declines, as firms compress margins under weaker demand - Variance decompositions indicate global and domestic demand shocks account for most exchange rate movements - Interpretation guidance: exchange rate movements should be interpreted in light of their underlying drivers; demand-driven movements tend to exhibit limited pass-through, while some supply-side shocks can amplify inflation pressures and warrant careful policy judgment - Note: Pass-through is defined as the median ratio of cumulative impulse responses of consumer prices to exchange rate movements. - Prepared by Flora Lutz (RES). *International Monetary Fund — CANADA chapter excerpt* ### Box 2. Policy Response to Tariff Shocks: Model-Based Assessment ### Box 2. Policy Response to Tariff Shocks: Model-Based Assessment ### Methodology - Model: small open-economy structural model calibrated to Canada, with nominal and real frictions and an explicit fiscal block. - Monetary policy operates through the policy rate. - Simulation start: end-2024 conditions with a modest negative output gap, inflation near target, a restrictive monetary policy stance, and moderate public debt. - Shock: a sustained 5 percent increase in foreign prices of Canadian exports, which initially reduces external demand, widens the output gap, and weakens the trade balance. ### Assessment of policy responses - Policy design: - Monetary policy follows a standard Taylor-type reaction function in the analysis. - Fiscal policy is governed either by simple debt-stabilizing rules or allows temporarily countercyclical support under a welfare-maximizing (Ramsey-optimal) benchmark that preserves price stability and medium-term debt sustainability. - Monetary policy easing alone: - Easing supports activity via lower real interest rates and exchange rate depreciation, partially offsetting weaker external demand. - Under the simple-rule framework—where most adjustment falls on monetary policy—rates would ease by about 100 basis points, supporting consumption and investment, but output and the trade balance recover only gradually. - Countercyclical fiscal response: - Allowing fiscal policy to respond countercyclically strengthens stabilization. - With public debt at moderate levels, temporary fiscal support can cushion demand, permitting a modest, transient deviation from the long-run debt path while monetary policy remains accommodative. - Fiscal transfers support household income and consumption, reducing the adjustment burden on interest rates. - Outcomes: output stabilizes more rapidly; inflation remains well contained (peaking at about 2¼ percent); and debt dynamics are smoother. - As growth strengthens, revenues recover and gradual consolidation returns debt to its medium-term anchor. ### Bottom line / Policy recommendation - A countercyclical policy mix—temporary, well-anchored fiscal support alongside accommodative monetary policy—delivers stronger stabilization while preserving price stability and fiscal credibility. *Sources: IMF Staff calculation.* ### Box 6. Toward One Canadian Economy ### Box 6. Toward One Canadian Economy ### Measuring trade costs - Methodology and scope: - Uses an empirical gravity framework, based on the Head-Ries index, to translate trade frictions into tariff-equivalent costs by comparing interprovincial with intraprovincial trade flows, controlling for sectoral and regional characteristics. - Trade costs decomposed into geographic and non-geographic components; non-geographic components capture policy frictions including regulatory divergence and administrative burdens. - Estimates cover 230 sectors across 13 provinces and territories over 1997-2021. - Key quantitative finding: - Non-geographic barriers average about 9½ percent tariff equivalents nationally. - Non-geographic costs are higher in smaller provinces and in services. ### Macroeconomic gains from liberalization - Model and aggregate impact: - An Eaton-Kortum-type general equilibrium model is used to quantify impacts of reducing internal trade barriers. - Eliminating all non-geographic, non-policy trade barriers could raise Canada’s real GDP by roughly 7 percent over the long run—about C$210 billion in 2025. - Transmission: - Gains stem from stronger labor productivity driven by improved resource allocation. - All provinces benefit, with proportionally larger gains in smaller jurisdictions. ### Provincial impacts (from complete elimination of measured non-distance internal trade costs) - Displays the percentage point change in labor productivity (real GDP per worker) and employment in all provinces and territories: - British Columbia: 5.7 -1.6 - Alberta: 4.9 -2.8 - Saskatchewan: 13.9 10.1 - Manitoba: 12.2 7.6 - Ontario: 3.6 -4.5 - Quebec: 6.9 0.0 - New Brunswick: 26.6 29.1 - Nova Scotia: 23.7 24.6 - Prince Edward Island: 39.5 49.1 - Newfoundland and Labrador: 15.4 12.3 - Yukon: 37.9 46.6 - Northwest Territories: 39.1 48.5 - Nunavut: 76.7 112.8 - Canada (aggregate): 6.8 ### Sectoral priorities - Sectoral composition of gains: - Services account for roughly 90 percent of the total GDP gains. - Prioritization criteria: - Policymakers should prioritize high-impact sectors defined as those both heavily traded across provinces and central to the production network through strong input-output linkages. - Cross-sector enablers identified: - Finance, telecommunications, and transportation emerge as cross-sector enablers whose liberalization would generate larger economy-wide effects, even when measured trade costs appear modest. - Example sectors shown as high influence despite varied non-distance costs: - Electricity; Truck Transportation; Telecommunications; Banking; Physicians. ### Resilience and implementation - Resilience to external shocks: - Simulations show that a 10-percent rise in trade costs from U.S. tariffs on Canadian goods exports could be offset by a 5 percent reduction in internal trade costs (though tariff impacts would materialize faster than internal liberalization gains). - Reducing internal barriers is expected to support East-West trade and support international trade diversification. - Implementation requirements and risks: - Sustained progress depends on effective intergovernmental coordination, transparent benchmarking of trade barriers, and clear incentives for provincial alignment. - Implementation constraints imply sequencing and prioritization (focus on high-impact sectors and cross-sector enablers). *Prepared by Federico J. Díez, Yuanchen Yang (both IMF), and Trevor Tombe (University of Calgary).* ### Annex I. Government Support Measures ### Annex I. Government Support Measures ### Immediate Relief Measures for Workers - Employment Insurance for Long-Tenured Workers: Temporarily give long-tenured workers in affected sectors 20 extra weeks of income support, up to a maximum of 65 weeks; expected to support about 190,000 long-tenured workers. Amount/Cost: C$1.6 billion over 5 years. - Extension of certain Employment Insurance (EI) measures: - 1/ Rules on separation payments will be suspended so that workers can keep severance payments while also receiving EI benefits. Amount/Cost: C$424 million over 2 years. - 2/ The one-week waiting period will be waived for workers to receive benefits for the first week of unemployment, supporting an additional 700,000 claimants. Amount/Cost: C$418 million over 2 years. ### Immediate Liquidity Relief Measures for Firms - Loan Expansion for SMEs by Business Development Bank of Canada (BDC): Expand BDC loans for SMEs. Increase in max. loan size from C$2 to C$5 million per business (loan cap). - Large Enterprise Tariff Loan Facility: Provide more flexible financing (lower interest rates, longer maturities) to large enterprises (revenues > $300 million) impacted by tariffs, based on the applicant’s estimated liquidity shortfall for the next 12 months. Loan size of > C$60 million. - EVAS Adjustment for Auto Sector Flexibility: Waive 2026 model year vehicles from Electric Vehicle Availability Standard (EVAS) requirements; launch 60-day review to reduce auto sector costs. Amount/Cost: Not specified. - Advance Payments Program (APP) – For Agricultural and Canola Producers: Temporarily increase the interest-free limit on liquidity facility for canola producers from $250K to $500K for remainder of 2025 and 2026 program years. Amount/Cost: Tbc - $500,000 per producer (interest-free advance cap) for 16 months. ### Other Industrial Policy Measures (Support and Demand Creation) - Strategic Response Fund: New flexible fund to help firms in all sectors with projects > $20 million impacted by tariffs adapt, diversify & grow. Amount/Cost: C$5 billion. - Regional Tariff Response Initiative (SME): Expand previous initiative from $450 million to $1 billion to support SMEs impacted by tariffs with non-repayable contributions up to $1 million per business in all impacted sectors for projects < $20 million; total funding over three years. Amount/Cost: C$1 billion over 3 years. - Biofuel Production Incentive: Introduce incentive for domestic biofuel production over 2 years (2026/01-2027/12), by amending Clean Fuel Regulations to assist domestic producers and restructure their value chains. Amount/Cost: Over $370 million over 2 years. - Buy Canadian Policy: Mandate federal procurement from domestic suppliers (initially in steel and softwood lumber, extendable), require local content if unavailable, extend across federal funding streams (for infrastructure, grants, contributions, loans and other federal funding streams reaching additional $70 billion in spending) and all federal agencies and crown corporations. Amount/Cost: Not quantified. ### Structural Policies (Trade Facilitation, Active Labor Market Policies etc.) - Support for Agricultural and Canola Producers: Expand the AgriMarketing Program into high-growth areas (e.g., Africa, Middle East, Indo-Pacific). Amount/Cost: C$75 million over five years. - EVAS Review: Launch a 60-day review of the Electric Vehicle Availability Standard, potentially adjusting targets (e.g. annual sales targets) beyond 2026 to relieve burden on automakers; explore options to bring more affordable electric vehicles to Canadians. - Reskilling Package: Introduce a new reskilling package for up to 50,000 workers via Employment Insurance and Labour Market Development Agreements (LMDAs). Amount/Cost: C$450 million over 3 years. - Recruitment Support through Workforce Alliances & Sectoral Workforce Innovation Fund: Coordinate public and private investments in skills development; focus on affected sectors (e.g. auto parts, steel, aluminum) and growth potential sectors (e.g. energy, critical minerals, advanced manufacturing). Amount/Cost: C$ 382 million over 5 years. - Job Search and Matching Initiatives: Launch a national online training platform to help adults find short-duration training courses by skill type, location, and format. ### Targeted Measures to Support Steel and Lumber Sectors - Limit foreign steel imports: Tighten tariff rate quota levels for steel products from non-free trade agreement (FTA) partners from 50% to 20% of 2024 levels. For non-CUSMA partners with which Canada has an FTA, reduce tariff rate quota levels for steel products from 100% to 75% of 2024 levels. Impose a global 25% tariff on targeted imported steel-derivative products such as wind towers, prefabricated buildings, fasteners, and wires. - Enhance usage of Canadian steel and lumber: - Cut freight rates for transporting Canadian steel and lumber interprovincially by 50%, beginning in Spring 2026. - Create new demand for wood products in housing: Build Canada Homes will prioritize shovel-ready, multi-year projects that can begin within 12 months and that use Canadian wood products. - Implement Buy Canadian Policy requiring that all contracts worth over $25 million prioritize Canadian materials – including steel and lumber; will also apply across federal grants and contributions programs. - Increase protections for Canadian steel and lumber workers and businesses: - Provide support for eligible employers in all sectors with an active Work-Sharing agreement and who commit to support training for employees working reduced hours. This measure will increase the income replacement for eligible workers, helping up to 26,000 Canadian workers in various sectors, including steel and lumber. - Help companies maintain and restructure their operations during this period of transformation. - Support softwood lumber firms facing liquidity pressures: Launch a Canadian Forest Sector Transformation Task Force to seek input and recommendations from provinces, territories, and industry on managing the sector’s transformation. Amount/Cost: C$50 million over five years. - Funding and demand impacts stated in the source: - Together with additional measures, these will unlock over C$1 billion in new domestic demand for Canadian steel. - With a funding allocation of roughly C$700 million next year, creating C$70 to C$140 million of new demand for Canadian wood products – and attract private and provincial capital to multiply its impact. - Over C$100 million over two years. - An additional C$500 million to the Business Development Bank of Canada (BDC) Softwood Lumber Guarantee Program. - About C$500 million in funding under the Large Enterprise Tariff Loan facility. - Not quantified for some measures. *Source: Annex I. Government Support Measures (Announced in Autumn 2025), from the provided IMF content.* ### Annex III. Figure 2. Canada: Debt Coverage and Disclosures ### Annex III. Figure 2. Canada: Debt Coverage and Disclosures ### Debt coverage and consolidation - Coverage used in the DSA: "1/CGGGNFPSCPSOther" - If central government, are non-central government entities insignificant? n.a. - Chosen consolidated perimeter: general government consolidated level (federal government, provincial and territorial governments, local governments, and social security funds) — commentary in source: "The coverage in this SRDSA is at the general government consolidated level, which includes the federal government, provincial and territorial governments, local governments, and social security funds." - Subsectors included in the chosen coverage: - Budgetary central government: Ye s - Extra budgetary funds (EBFs): No - Social security funds (SSFs): Ye s - State governments: Ye s - Local governments: Ye s - Public nonfinancial corporations: No - Central bank: No - Other public financial corporations: No - Basis of recording / valuation: "Valuation of debt stock" / "Not applicable" - Reporting on intra-government debt holdings: entries include "Nonfin. pub. corp.", "GG: expected", "State govt.Local govt.", "CG", "CPS", "Debt securities" - Holder–Issuer consolidation table (selected reported numbers preserved exactly): - Budget. central govt: 24,068 52,849 6,627 83,544 - Extra-budget. funds: 0 - Social security funds: 817 1,779 506 3,102 - State govt.: 337 46,297 13,848 60,482 - Local govt.: 221,039 404 1,465 - Nonfin pub. corp.: 0 - Central bank: 0 - Oth. pub. fin. corp: 0 - Total: 1,176 071,404 55,032 20,981 000 148,593 - Instruments and accounting principles sections are present but not populated with additional numeric detail in the supplied extract. ### Public debt structure indicators (summary) - Commentary: "Gross public debt includes sizable accounts payable (about 17.2 percent of GDP at end-2024), and dominated by local-currency instruments. Average debt maturity is assumed to be gradually lengthened over the medium term." - Debt by currency, holder, governing law, instruments, and maturity charts are presented for the general government perimeter (visuals in source). - Residual maturity: 6. years (as shown in figure caption) ### Baseline scenario (percent of GDP unless indicated otherwise) - Public debt series (actual and projections shown exactly as in source): - 2024: 110.0 - 2025: 110.6 - 2026: 110.9 - 2027: 109.8 - 2028: 108.0 - 2029: 106.3 - 2030: 104.3 - 2031: 102.4 - 2032: 100.4 - 2033: 98.5 - 2034: 96.6 - Change in public debt: - 2024: 5.0 - 2025: 0.6 - 2026: 0.3 - 2027: -1.1 - 2028: -1.7 - 2029: -1.8 - 2030: -1.9 - 2031: -2.0 - 2032: -2.0 - 2033: -1.9 - 2034: -1.9 - Contribution of identified flows (selected lines preserved exactly): - Contribution of identified flows: -2.6 0.7 0.3 -1.1 -1.7 -1.7 -1.9 -1.9 -2.0 -1.9 -1.9 - Primary balance (row entries across projection): 2.1 1.6 2.2 1.8 1.4 1.3 1.0 1.0 1.0 1.1 1.2 - Noninterest revenues: 38.8 38.7 38.6 38.6 38.6 38.6 38.6 38.7 38.7 38.7 38.7 - Noninterest expenditures: 40.9 40.3 40.8 40.5 40.0 39.8 39.6 39.7 39.7 39.8 39.9 - Automatic debt dynamics: -1.3 -1.1 -0.5 -0.7 -0.4 -0.3 -0.3 -0.3 -0.2 -0.2 -0.3 - Real interest rate and relative inflation: 0.7 0.7 1.2 1.4 1.4 1.5 1.5 1.5 1.5 1.4 1.4 - Real interest rate: 0.7 0.7 1.2 1.3 1.4 1.5 1.4 1.5 1.5 1.4 1.4 - Relative inflation: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Real growth rate: -2.1 -1.8 -1.7 -2.0 -1.8 -1.8 -1.7 -1.7 -1.7 -1.7 -1.6 - Other identified flows: -3.4 0.2 -1.4 -2.2 -2.7 -2.6 -2.6 -2.6 -2.8 -2.8 -2.8 - Contingent liabilities: 0.0 repeated across projection - (minus) Interest Revenues: -3.4 -3.7 -3.5 -3.3 -3.2 -3.1 -3.1 -3.1 -3.1 -3.1 -3.1 - Other transactions: 0.0 3.9 2.1 1.1 0.5 0.5 0.5 0.4 0.3 0.3 0.3 - Contribution of residual: 7.6 -0.1 -0.1 -0.1 0.0 -0.1 -0.1 0.0 0.0 0.0 0.0 - Gross financing needs and debt service (rows preserved): - Gross financing needs: 18.5 20.0 22.2 22.9 20.4 21.7 24.1 22.3 21.2 21.4 22.4 - of which: debt service: 19.8 22.1 23.5 24.4 22.2 23.5 26.1 24.4 23.3 24.3 24.3 - Local currency: n.a. 21.1 22.4 23.5 21.6 22.8 25.2 23.8 22.8 22.9 23.8 - Foreign currency: 0.0 1.0 1.0 0.9 0.6 0.7 0.9 0.6 0.5 0.5 0.6 - Memo: - Real GDP growth (percent): 2.0 1.6 1.6 1.9 1.7 1.7 1.7 1.7 1.7 1.7 1.7 - Inflation (GDP deflator; percent): 2.7 2.6 2.5 2.3 2.2 2.1 2.1 2.1 2.1 2.1 2.1 - Nominal GDP growth (percent): 4.8 4.2 4.1 4.2 3.9 3.8 3.8 3.8 3.8 3.8 3.8 - Effective interest rate (percent): 3.4 3.2 3.6 3.6 3.5 3.5 3.5 3.5 3.5 3.5 3.5 - Commentary accompanying baseline: "Despite the upward pressure from primary deficits, the decline in debt-to-GDP ratio over the medium term is largley driven by real GDP growth and interest revenue and other flows." ### Realism of baseline assumptions and forecast track record - Commentary: "realism analysis does not point to major concerns, despite some previous errors in debt ratio forecast. Further, the projected deficit and debt reductions are, respectively, close to the median and well within the inter-quartile range of the distribution." - Observations from realism analysis: - Large contribution of the residual to debt accumulation in the past five years driven mostly by unprecedented support measures implemented in 2020; expected to be paid off in the next few years, resulting in large negative contribution of the residual to debt accumulation. - Financing terms are stable (Canada has a negative spread vs US) and projected growth is in line with potential and historical average. ### Medium-term and long-term risk analysis (key metrics and signals) - Debt fanchart / long-run metrics: - Debt fanchart width: 47.9 0.7 (percent of GDP) - Probability of debt non-stabilization (percent): 68.0 0.6 - Terminal debt-to-GDP x: 18.4 0.4 - Debt fanchart index (DFI): 1.7 - Risk signal (DFI): "Moderate" (source note: low if DFI < 1.13; high if DFI > 2.08; otherwise moderate) - Gross financing needs (GFN) module: - Average baseline GFN: 21.9 7.5 (percent of GDP) - Initial Banks' claims on the gen. govt: 5.4 1.7 (pct bank assets) - Change in banks' claims in stress: 0.8 0.3 (pct banks' assets) - GFN financeability index (GFI): 9.5 - Risk signal (GFI): "Moderate" (source note thresholds provided in figure) - Medium-term index and final assessment: - Medium-term index: value and weight contributions aggregated in figure; final assessment text: "although the debt fanchart, GFN module and signal suggest a moderate level of risk, the overall medium-term risk level is assesed to be actually low, partly driven by the projected consolidation and the large holding of financial assets by the government." - Prob. of missed crisis, 2025-2030, if stress not predicted: 18.2 pct. - Prob. of false alarms, 2025-2030, if stress predicted: 36.4 pct. - Long-term risk analysis: - Overall long-term risks assessed as "low" — commentary: "Long-term risks are assessed as low, supported by declining debt-service burdens over the forecast horizon. The projected secular decline in GFNs reinforces the low overall risk assessment. Canada’s strong policy frameworks and fundamentals—including a positive NIIP and stable external financing—also provide important buffers." - Figures show GFN-to-GDP and Amortization-to-GDP ratios declining in long-run projections (visuals in source). ### Risk matrix highlights (selected global and domestic risks and policy responses) - Geopolitical Tensions - Relative Likelihood: High - Impact: High - Policy response: "Actively pursue international economic cooperation. Continue to enhance competitiveness and strengthen policy frameworks to manage exposure to commodity-price volatility. Ensure close monetary-fiscal coordination to cushion a global downturn, calibrating the response to inflation and commodity-price developments while advancing structural reforms to boost productivity." - Escalating Trade Measures and Prolonged Uncertainty - Relative Likelihood: High - Impact: High - Policy response: "Strengthen competitiveness and supply-chain resilience by reducing internal trade barriers and deepening market diversification. Maintain predictable, rules-based trade and investment frameworks, while using macroeconomic policies to support demand and contain inflation if external shocks intensify." - Financial Market Volatility and Correction - Relative Likelihood: High - Impact: Medium - Policy response: "Strengthen supervision and data coverage of NBFIs, expand stress testing to capture cross-sector linkages, and ensure macroprudential buffers remain adequate. Maintain clear policy communication and credible fiscal anchors to preserve market confidence and limit spillovers to sovereign yields and credit conditions." - Climate Change (structural risk) - Relative Likelihood: Medium - Impact: Medium - Policy response: "Stay committed to climate-mitigation and adaptation goals while ensuring predictable, well-sequenced transition policies that anchor private investment. Strengthen climate-related financial disclosures, integrate physical and transition risks into supervision, and prioritize resilient infrastructure investment." - Labor Supply Gaps (domestic) - Relative Likelihood: Medium - Impact: Medium - Policy response: "Maintain a predictable immigration framework that addresses sectoral gaps while aligning inflows with housing, infrastructure, and public service capacity. Advance credential recognition and training reforms to improve labor matching and support productivity growth." ### Key FSAP recommendations (selected with timing) - Timing legend: I = Immediate (within one year); ST = Short Term (within 1–3 years); MT = Medium Term (3–5 years). - Systemic Risk Monitoring, Analysis, and Coordination, Including Climate - Enhance coordination on stress testing methodologies and results (BOC, OSFI, and AMF) — ST - Continue to closely monitor mortgage refinancing risks, household and corporate liquidity buffers, and enhance RESL data coverage and quality (BOC, OSFI, and AMF) — ST - Expand reporting and monitor LCR for all large pension plans (OSFI, FSRA, FA, PA) — ST - Strengthen data sharing and collaboration with natural hazard and climate experts and establish standard climate data and risk frameworks across provinces (OSFI, AMF, FA, PA) — MT - Financial Oversight - Provide OSFI, AMF, FSRA with an explicit mandate listing safety and soundness of supervised firms and contribution to financial stability as primary objectives (Federal, Provincial DOF) — ST - Strengthen budgetary autonomy of OSFI, AMF, and FSRA (Federal and Provincial DOF) — ST - Remove barriers for exchange of confidential information and strengthen federal-provincial supervisory cooperation, including on systemic risk issues (DOF, OSFI, PA, AMF, FSRA) — ST - Macroprudential Policy - Establish a mechanism for taking action on systemic risks (BOC, other FA and PA) — ST - Extend the Domestic Stability Buffer to all domestically important deposit taking institutions (DTIs) and establish a positive neutral CCyB for remaining DTIs (OSFI, AMF, other PA) — ST - Regulation and Supervision of Banks and Nonbank DTIs - Increase bank supervision intrusiveness through more frequent and deeper reviews (OSFI) — I - Align the related-party framework with international standards (FA, PA, OSFI, AMF, FSRA) — ST - Insurance and Pension Oversight - Implement consolidated supervision for insurance groups (DOF–Federal and Québec) — ST - Enhance supervision of governance and internal controls at large pension plans (FSRA, OSFI) — ST - Strengthen authorities’ powers to get confidential information from pension plans (FA, PA) — ST - Investment Fund Regulation and Supervision - Align the liquidity framework with FSB-IOSCO guidance and strengthen stress-testing (CSA) — MT - Strengthen oversight of custodians and broaden related supervisory activities (CSA) — MT - Cyber Resilience - Increase legal and regulatory powers over third-party providers (DOF, OSFI, BOC, PA) — MT - Leverage existing structures to set up a process to manage systemic cyber incidents (FA/PA) — I - AML/CFT - Deepen understanding of cross-border ML/TF risks (DOF, FINTRAC, OSFI) — I - Ensure effective risk-based supervision of banks through more intrusive engagements, dissuasive sanctions, and adequate supervisory resources (DOF, FINTRAC) — I - Crisis Preparedness and Management / Financial Safety Nets - Harmonize federal-provincial deposit insurance schemes and update their coverage (FA, PA) — MT - Establish a resolution framework for insurers (DOF, OSFI, PA) — MT - Strengthen domestic funding markets and closely monitor foreign funding risks (FA, PA) — ST - Raise ELA minimum rate and grant systemic NBFIs access to bilateral liquidity support (BOC) — ST *Source: Annex III. Figure 2. Canada: Debt Coverage and Disclosures (extracted text and figures) from the supplied IMF content unit.* ### Annex VI. Data Issues ### Annex VI. Data Issues ### Data adequacy assessment (Figure 1) - Median Rating across sectors: A A A A B A A - Questionnaire Results (sectoral assessment): - National Accounts: A - Prices: A - Government Finance Statistics: A - External Sector Statistics: A - Monetary and Financial Statistics: B - Inter-sectoral Consistency: A - Detailed questionnaire results — Data Quality Characteristics (selected): - Coverage: A A A A B - Granularity (notes show two cells where applicable): A / A A B - Consistency: B A A - Frequency and Timeliness: A A B A A - Legend: - A = The data provided to the Fund are adequate for surveillance. - B = The data provided to the Fund have some shortcomings but are broadly adequate for surveillance. - C = The data provided to the Fund have some shortcomings that somewhat hamper surveillance. - D = The data provided to the Fund have serious shortcomings that significantly hamper surveillance. ### Rationale for staff assessment and identified data gaps - Principal findings: - Statistics Canada and the Bank of Canada generally provide timely and adequate data for surveillance. - Timeliness issue: central government operations are disseminated monthly within 60 instead of 30 days after the end of the reference period; room for timelier dissemination remains. - Coverage and granularity in Monetary and Financial Statistics (MFS) could be enhanced. - Data gaps on NBFIs and detailed data on other depository corporations: missing breakdowns by financial instrument, currency of denomination, and counterparty. - Bank of Canada (BOC) disseminates timely central bank balance sheet data but has not disseminated balance sheet data for other depository corporations or other financial corporations for many years; discontinuation coincides with the task moving from BOC to StatCan. - Other data gaps: - Progress on closing NBFI liquidity data gaps remains slow, notably for non-federal pension funds where supervisory responsibilities remain unclear, and exchange of information remains scarce. - Resuming balance sheet data reporting for other depository corporations (2SR) and other financial institutions (4SR) would strengthen risk monitoring. - Some data gaps in assessing housing supply areas: zoning and permitting, land banking, or development charges. - In the context of immigration, the number of temporary workers leaving Canada is not well recorded. - Changes since last Article IV consultation: No relevant changes since last Article IV consultations. - Corrective actions and capacity development priorities: Not relevant for Canada. - Use of alternative data: Staff does not use any data and/or estimates in the staff report in lieu of official statistics. ### Data Standards Initiatives (Figure 2) - Canada adheres to the Special Data Dissemination Standard (SDDS) Plus since April 2017 and publishes the data on its National Summary Data Page. - The latest SDDS Plus Annual Observance Report is available on the Dissemination Standards Bulletin Board. ### Common Indicators Required for Surveillance (Annex VI. Table 1; As of December 5, 2025) - The table lists Common Indicators and corresponding metadata (Date of Latest Observation, Date Received, Frequency of Data, Frequency of Reporting, Expected Frequency, Expected Timeliness, Data Provision to the Fund). - Selected date entries visible in the table: - Same day / Same day / DDD - 28-Nov-25 / 04-Dec-25 - 30-Sep-25 / 19-Nov-25 - 31-Oct-25 / 13-Nov-25 - 31-Oct-25 / 01-Dec-25 - 2025 Q3 / 28-Nov-25 - 2025 Q2 / 10-Sep-25 - 2025 Q2 / 11-Sep-25 - 31-Aug-25 / 07-Oct-25 - 2025 Q3 / 28-Nov-25 - Key indicator headings included in the table: - Exchange Rates - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Reserve/Base Money - Broad Money - Central Bank Balance Sheet (including currency and maturity composition) - Consolidated Balance Sheet of the Banking System - Interest Rates (both market-based and officially determined) - Consumer Price Index - Revenue, Expenditure, Balance and Composition of Financing — General Government - Revenue, Expenditure, Balance and Composition of Financing — Central Government - International Investment Position (includes net market value of derivative positions) - Stocks of Central Government and Central Government-Guaranteed Debt - External Current Account Balance - Exports and Imports of Goods and Services - GDP/GNP - Gross External Debt - Notes on frequencies/timeliness coding used in the table: - “D” daily; “W” weekly or with a lag of no more than one week after the reference date; “M” monthly or with lag of no more than one month after the reference date; “Q” quarterly or with lag of no more than one quarter after the reference date; “A” annual; "SA" semiannual; "I" irregular; "NA" not available or not applicable; and "NLT" not later than. - Data provision note: Based on information from the Summary of Observance for SDDS and SDDS Plus participants, and the Summary of Dissemination Practices for e-GDDS participants, available from the IMF Dissemination Standards Bulletin Board. ### Use in surveillance and follow-up - Use in Article IV consultations: Staff does not use any data and/or estimates in the staff report in lieu of official statistics. - Recommended priority actions (implicit from identified gaps): - Improve timeliness of central government monthly data dissemination from 60 to 30 days after the reference period. - Enhance MFS coverage and granularity, especially for NBFIs and other depository corporations with breakdowns by financial instrument, currency of denomination, and counterparty. - Resume balance sheet data reporting for other depository corporations (2SR) and other financial institutions (4SR). - Strengthen data collection on housing supply constraints (zoning and permitting, land banking, development charges). - Improve recording of departures of temporary workers to better inform immigration-related analysis. *Source: Annex VI. Data Issues (staff report material).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1canea2026001.pdf_