Canada’sGrowth-InflationRegimeShiftandWhatitMeansforAllocators
This paper argues that Canada has entered a structurally different macroeconomic regime, marked by weaker potential growth and more persistent inflation pressure. Since 2014–2015, Canada’s cumulative net capital flows, fiscal balance, and current account have deteriorated in a manner that does not resemble prior cyclical slowdowns. Rather than mean-reverting, these trends suggest a durable shift driven by declining capital formation, outward institutional investment flows, expanding fiscal deficits, and ongoing external imbalances.
The coexistence of sustained capital outflows, rising fiscal deficits, and current-account shortfalls creates an asymmetric growth–inflation outcome. Fiscal policy increasingly supports consumption rather than productive investment, constraining supply while sustaining demand. At the same time, persistent external deficits heighten currency vulnerability, increasing the risk of imported inflation even in periods of modest domestic growth.
For allocators, the central risk is continuing to position portfolios as though Canadian growth and inflation dynamics remain cyclical and self-correcting. Traditional portfolio constructions implicitly rely on stable capital inflows, benign fiscal constraints, subdued inflation, and reliable stock–bond diversification. In a regime characterized by structurally weaker growth, positive stock–bond correlation, and elevated inflation persistence, these assumptions warrant reassessment.