Canada's Economic Growth to Accelerate in Two Stages, Morgan Stanley Says

Morgan Stanley says Canada's economic growth is poised to accelerate in two stages. The first stage, already underway, will last through the end of the 2020s and be driven by increased capital per worker leading to higher productivity. This will lift potential economic growth toward 1.7%.

The second stage, expected in the 2030s, will see Canada's demographic profile become more supportive, with working-age population growth remaining positive while much of Europe and Japan experience declines. At this point, sustained gains in multifactor productivity could push potential growth closer to 2%. However, turning Canada's large but concentrated investment pipeline into a broader private-sector capital cycle is the key challenge.

Utilities, transportation, and resources account for most of the tangible capital spending pipeline, while sectors such as construction, manufacturing, wholesale, and agriculture will be crucial in spreading productivity gains across the wider economy. Morgan Stanley estimates that completing projects already in the pipeline could add about 20 basis points to medium-term growth.

The bank argues that Canada is 'investment-starved, not capital-starved', pointing to the country's deep pension and institutional balance sheets as a source of funding. However, domestic projects need to generate sufficiently attractive risk-adjusted returns to attract private capital. Faster depreciation, permitting reforms, government guarantees, co-investment, and enabling infrastructure could lower investment hurdles.

Trade remains the biggest near-term risk, with Morgan Stanley warning that uncertainty over tariffs and treatment of individual sectors could keep investment hurdles elevated and delay corporate spending. The USMCA agreement could preserve Canada's formal market access, but greater uncertainty is still a concern.