AI, immigration, and productivity: the forces reshaping Canada’s economy

The Canada economy outlook no longer turns on a single story. For years, it was easy to explain growth through housing, commodities, consumer spending, and population gains. Today, however, that frame feels too narrow. Canada is being reshaped by three forces at the same time: artificial intelligence is changing how firms operate, immigration policy is being recalibrated after a period of very rapid inflows, and productivity has become the question that sits behind almost every debate about wages, affordability, competitiveness, and long-term prosperity.

In other words, the country is not simply trying to grow; it is trying to grow better, with more output per worker and fewer structural bottlenecks.

That shift matters because headline growth alone does not settle the issues Canadians feel in daily life. A bigger population can lift total GDP, yet living standards still feel strained if housing, infrastructure, business investment, and worker efficiency do not keep pace.

That is exactly why the conversation around Canada’s economy has become more complex. Immigration still matters deeply for labour supply, entrepreneurship, and demographic renewal.

AI still offers real upside for firms that want to work faster and smarter. But productivity is the bridge between those forces and better outcomes. Without stronger productivity, Canada can add people and software while still struggling with weak per-person gains.

Canada is entering a different growth era

Canada spent much of the past few years absorbing an unusually strong population surge, especially through temporary residents. Then policy changed. Statistics Canada reported that population growth slowed sharply through 2025, with the first quarter adding just 20,107 people, the smallest quarterly growth since 2020 and one of the weakest rates on record.

By the fourth quarter of 2025, the country’s population had actually declined by 103,504 people from the previous quarter, driven mainly by fewer non-permanent residents.

That does not mean immigration has stopped mattering. It means the economic model is changing from one powered heavily by rapid inflows to one that must extract more value from each worker, each business investment, and each new technology decision.

At the same time, Ottawa has not abandoned immigration as an economic tool. It has narrowed and rebalanced it. Under the 2026–2028 Immigration Levels Plan, Canada set temporary resident arrival targets at 385,000 in 2026 and 370,000 in both 2027 and 2028, while stabilizing permanent resident admissions at 380,000 per year.

The government also signalled that economic immigration will take a larger share of the permanent stream, reaching 64% by 2027. So the message is not “less immigration, period.” Rather, the message is “more controlled immigration, with a sharper economic focus and less pressure on housing and services.”

Productivity is still the main scorecard

If there is one issue economists keep returning to, it is productivity. The reason is simple: productivity is what allows an economy to raise wages and living standards without relying only on longer work hours or faster population growth.

When businesses produce more value per hour worked, they create room for better pay, stronger margins, more tax revenue, and more resilient public finances. When productivity stalls, by contrast, the country can feel busy without becoming significantly more prosperous.

Why productivity matters more than headline GDP

This is the part of the story that often gets missed in public debate. GDP growth sounds impressive, yet it can mask a weak underlying engine. OECD analysis says Canada has lagged the best-performing OECD economies on productivity for years, with low investment activity and weak business R&D among the main contributors.

The IMF has echoed that concern, calling stronger productivity and competitiveness Canada’s central medium-term challenge. Taken together, these views suggest that Canada’s economic test is no longer whether it can expand at all, but whether it can expand in a way that actually improves efficiency and income growth.

The 2025 rebound was real, but not enough

There was, to be fair, some good news in the latest data. Statistics Canada reported that business labour productivity rose 1.1% overall in 2025, the second straight annual increase after three weak years. Real GDP for businesses grew 1.9%, while hours worked rose a slower 0.8%, which helped lift output per hour. That is meaningful progress, and it should not be dismissed.

Even so, one decent year does not erase a long period of underperformance. Canada still needs a broader, more durable productivity cycle, especially one driven by investment, innovation, scale, and stronger diffusion of technology beyond a handful of leading sectors.

AI is moving from experiment to operating system

For a while, AI sat mostly in the realm of demos, pilot programs, and executive presentations. That phase is ending. Statistics Canada found that 12.2% of businesses used AI to produce goods or deliver services in the 12 months before the second quarter of 2025, up from 6.1% a year earlier.

That is a clear sign that AI is no longer just a future topic. It is already entering workflows, customer service, analytics, marketing, and decision support. Just as importantly, another 14.5% of firms planned to adopt AI over the following 12 months, which points to continuing diffusion rather than a one-off spike.

Where adoption is happening fastest

The adoption pattern tells its own story. AI use is strongest in information and cultural industries, professional, scientific and technical services, and finance and insurance. In the second quarter of 2025, those sectors reported AI use rates of 35.6%, 31.7%, and 30.6%, respectively.

That makes sense. These are industries with large volumes of text, data, compliance work, customer communication, research tasks, and knowledge-based processes. In short, they have many tasks that AI can assist, accelerate, or partially automate.

On the other side, sectors such as accommodation and food services, agriculture, and transportation showed much lower adoption. So the impact will not arrive evenly across the economy. Canada is likely to see an early AI dividend in white-collar, data-rich environments before it sees a fully economy-wide surge.

What AI is changing inside firms

The most useful way to think about AI in Canada right now is not as a wholesale replacement for workers, but as a tool that reshapes tasks and workflows. Among businesses that had used AI, the most common changes included developing new workflows, training current staff, buying cloud services or storage, and changing data practices. In fact, 40.1% reported developing new workflows and 38.9% reported training current staff to use AI.

That matters because productivity gains rarely come from software alone. They come from the much less glamorous work of redesigning processes, reassigning tasks, and helping employees use tools effectively.

The labour-market picture is also more nuanced than the loudest headlines suggest. Statistics Canada reported that 89.4% of AI-using businesses saw no change in employment levels after implementation. Separately, another Statistics Canada release found that from November 2022 to December 2025, employment generally grew regardless of potential occupational exposure to generative AI.

Jobs in occupations considered more exposed to and less complementary with AI still posted gains rather than collapse. That does not mean disruption is imaginary. It means Canada is still in the early adoption phase, where augmentation appears more visible than broad-based displacement.

Immigration is being recalibrated, not abandoned

Immigration remains central to Canada’s economic model for one obvious reason: demographics. An aging population needs workers, taxpayers, entrepreneurs, and skilled talent. Yet the recent policy turn shows that volume alone is not enough.

When inflows rise faster than housing supply, public services, and credential recognition systems can absorb, the economic gains become harder to translate into better living standards.

That is why the current immigration debate is really about alignment. Canada still wants talent and labour. It just needs a system that fits labour market needs more tightly and places fewer short-run pressures on rent, transit, classrooms, and healthcare.

From rapid inflows to more controlled targets

The recent numbers make that recalibration clear. As of July 1, 2025, non-permanent residents made up 7% of Canada’s population, or about 3.02 million people. The government’s current plan aims to reduce that share to below 5% by the end of 2027.

At the same time, permanent resident admissions are being kept below 1% of the population beyond 2027, while French-speaking admissions outside Quebec are set to rise. In practice, this means Canada is trying to shift from sheer inflow volume toward a steadier, more selective mix that supports labour market needs without intensifying every other bottleneck.

Why composition matters as much as volume

Composition matters because not all immigration affects the economy in the same way. A system tilted toward well-matched permanent economic immigrants can support longer-term integration, skills use, and household formation.

A system tilted too heavily toward short-term or poorly matched temporary streams can create labour supply quickly, but it may also intensify wage segmentation, turnover, and integration challenges.

Bank of Canada research notes that the composition of immigration has shifted significantly, with temporary workers becoming younger, less experienced, and more likely to come from lower-income countries between 2015 and 2024.

That research does not argue against immigration. Instead, it highlights that the quality of labour-market matching and the structure of pathways matter as much as total admissions.

Key indicators shaping the debate

Source for table: Statistics Canada releases on AI use by businesses, labour productivity, and population estimates; Immigration, Refugees and Citizenship Canada’s 2026–2028 Levels Plan.

How AI, immigration, and productivity reinforce each other

These three forces are often discussed separately, but they are tightly connected. AI can raise the output of existing workers. Immigration can expand the labour force and fill skill gaps. Productivity determines whether those gains turn into higher incomes rather than just higher activity.

When the system works well, the effects compound: firms adopt better tools, workers use them effectively, newcomers bring skills and entrepreneurial energy, and output per hour rises. That is the virtuous version of Canada’s next growth model.

There is, however, a weaker version of the same story. Firms could adopt AI unevenly, especially if smaller businesses lack capital, data systems, or skilled staff. Immigration could remain poorly aligned with credential recognition, housing supply, and regional labour shortages. Productivity could improve in a few frontier sectors while the rest of the economy drifts. In that scenario, Canada would still grow, but the gains would feel patchy.

A handful of firms would become much more efficient, while many households would continue to feel squeezed by costs and slow wage progress. That risk is precisely why policy design and business execution matter so much right now.

What this means for Canadian households and businesses

For workers, the message is less about panic and more about adaptation. The best opportunities are likely to go to people who can work with AI, not simply compete against it. That includes analysts, marketers, operations staff, accountants, project managers, developers, and customer-facing teams who learn to combine judgment with automation. It also means soft skills matter more, not less.

Communication, supervision, ethics, client management, and domain expertise become more valuable when routine parts of the job speed up. In a slower-immigration environment, employers may also place more value on retention, internal training, and better use of current staff.

For businesses, especially small and mid-sized ones, the challenge is practical. AI should not be treated as a branding exercise. It should be tied to specific frictions: slower proposal writing, inefficient scheduling, customer-service bottlenecks, duplicated data entry, or weak forecasting.

The firms most likely to benefit are not necessarily the ones making the loudest claims. They are the ones that pick a few use cases, clean up their data, train their teams, and measure results.

Likewise, businesses that rely on immigrant talent need a more strategic hiring approach as labour supply becomes less abundant and more policy-sensitive. The old assumption that more workers would simply keep arriving is less reliable now.

For policymakers, the takeaway is even broader. Canada does not need to choose between AI and immigration. It needs to connect them to a productivity agenda. That means faster credential recognition, better internal labour mobility, more competition, stronger adoption support for SMEs, and more investment in digital tools and management capability.

OECD and IMF assessments both point in that direction. Put simply, Canada’s next phase of prosperity will depend less on how many people it adds and more on how effectively it combines talent, technology, and capital.

Canada’s next economic chapter

Canada’s economy is being reshaped in real time, and the new map looks different from the one that defined the previous decade. AI is spreading, but unevenly. Immigration remains essential, but the policy era of very rapid inflows has clearly shifted. Productivity has improved, yet it remains the country’s central economic weakness.

The big opportunity lies in making these forces work together rather than at cross-purposes. If Canada can pair smarter technology adoption with better labour-market matching and a sustained productivity push, the result could be a more resilient economy with stronger wages and more durable growth. If not, the country risks staying busy without becoming meaningfully more prosperous.