Bank of Canada warns of low productivity ‘emergency,’ making it harder to control inflation


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Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, at a press conference in Ottawa on March 6.Sean Kilpatrick/The Canadian Press

The Bank of Canada issued a stark warning about the country’s weak labour productivity and low levels of business investment on Tuesday, saying the situation is an emergency that makes it harder to control inflation and which could erode living standards if left unaddressed.

In an unusually blunt speech in Halifax, senior deputy governor Carolyn Rogers said that Canada is slipping further behind the United States and other peer countries when it comes to economic output per hour worked.

She pointed to weak business investment, meagre competition and a failure to properly integrate skilled immigrants into the Canadian work force.

“I’m saying that it’s an emergency – it’s time to break the glass,” the central bank’s second-in-command told the business audience.

Canada has long lagged the United States when it comes to how much the economy produces per hour of work. But the situation has gotten worse over the past decade, especially coming out of the pandemic. Before the final quarter of last year, productivity had declined for six straight quarters.

“Back in 1984, the Canadian economy was producing 88 per cent of the value generated by the U.S. economy per hour,” Ms. Rogers said.

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“That’s not great. But by 2022, Canadian productivity had fallen to just 71 per cent of that of the United States. Over this same period of time, Canada also fell behind our G7 peers, with only Italy seeing a larger decline in productivity relative to the United States.”

The speech contained few hints about the near-term trajectory of monetary policy ahead of the bank’s next interest-rate decision on April 10. But Ms. Rogers said that weak productivity growth makes it more difficult for the Bank of Canada to keep a lid on inflation over time.

When companies become more productive, they can earn higher profits and pay better wages without passing cost increases along to customers. If productivity lags, rising labour costs tend to show up in higher prices.

“Increasing productivity is a way to protect our economy from future bouts of inflation without having to rely so much on the cure of higher interest rates,” Ms. Rogers said.

Concerns about Canadian productivity are nothing new. However, it’s unusual for the central bank to be so frank about the politically sensitive issue.

Canadian governments of all political stripes have struggled for years to encourage companies to invest and innovate. The current Liberal government has delivered a long line of programs, including its “supercluster” programs, startup procurement efforts and strategies for sectors such as artificial intelligence. All have failed to make a meaningful impact on productivity.

There are numerous theories about why Canada lags on productivity, despite having a well-educated work force, a strong research culture and access to foreign markets through trade agreements.

Ms. Rogers dialled in on two themes: weak business investment in machinery, equipment and intellectual property; and problems in the labour market matching skilled workers with the right jobs.

She noted that Canada has a larger proportion of small businesses, which tend to invest less. But she also pointed to weak competition in Canada, regulatory uncertainty and what she called a risk-averse business culture.

“Canada’s economy features many sectors where companies face limited levels of competition, whether from firms in other provinces, foreign rivals or new entrants,” she said. “Of course, every country has certain sectors that it champions, and there can be valid reasons to protect local businesses. However, too much protection can lead to problems.”

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When it comes to the labour market, she said Canada needs to do a better job integrating new workers into the economy, and aligning the immigration system with labour market needs.

Colin Deacon, who sits on the Senate’s banking, commerce and the economy committee, lauded Ms. Rogers’s focus on competition. He said the way to address weak business investment is by beefing up the Competition Bureau and tasking it with addressing anti-competitive policies across various pieces of legislation.

“CEOs will take [investment] more seriously if they have a competitor chomping at their heels,” Mr. Deacon said.

Ben Bergen, president of the Council of Canadian Innovators, said Ms. Rogers was right to highlight the problem, but her analysis was incomplete. The principal issue, he said, is that Canada does a poor job helping companies develop, retain and commercialize intellectual property. He said that Ottawa’s entire innovation strategy – how it manages research grants, industrial subsidies, trade policies and tax laws – needs to change.

“This idea that all we need to do is just throw open competition and everything will be fine, I think is the wrong diagnosis. What we actually need is complex, robust industrial strategies that lead us from idea creation, idea retention and then the selling of that idea globally through a domestically headquartered firm,” he said.

Jim Balsillie, the former chairman and co-CEO of Research In Motion, was more blunt in his assessment of the speech.

“The real emergency here is that the Bank of Canada is stuck in the past,” he said in an e-mail. “This speech could have been written 35 years ago. Vague gesturing at ‘IP’ and ‘AI’ while offering the same old traditional policy prescriptions from the same outdated toolkit will worsen Canada’s productivity problems rather than address them.”

Whatever the diagnosis, the cost of not addressing Canada’s productivity and investment problem is significant, said Tim Sargent, deputy executive director Centre For the Study of Living Standards.

“When resource prices are high, we can still make a very good living for everybody. But those prices can go down,” he said. Business investment in Canada’s resource sector has been notably weak since the oil-price downturn in 2015.

“Your only sure way of remaining amongst the advanced countries, and having that kind of standard of living, is to make sure that you have labour productivity that is growing over a long period of time.”



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