Weak productivity is an economic ‘emergency,’ Bank of Canada warns

The Bank of Canada is warning that waning productivity growth in the country is an “emergency” that can force higher interest rates and limit rising wages for Canadians.

Senior deputy governor Carolyn Rogers gave a speech in Halifax on Tuesday in which she sounded the alarm on Canada’s lagging productivity rates.

Rogers argued that productivity is a way to “inoculate the economy against inflation,” while sustaining “faster growth, more jobs and higher wages.” An economy with strong productivity growth also does not need to rely as much on interest rates when price pressures start to get out of hand, she said.

But Canadian productivity rates have fallen in six consecutive quarters despite signs of an uptick at the end of 2023, Rogers said, citing Statistics Canada data.

“You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass,” she told the crowd.

Productivity can be measured in a few ways, but in general it’s the level of economic output per hour worked. Improving productivity doesn’t necessarily mean Canadians working harder, but rather equipping them with the tools they need to accomplish more in the same amount of time, Rogers said.

One of the main issues dragging down Canadian productivity rates is a lack of business investment. Canadian businesses routinely lag their global counterparts when it comes to investment in machinery, equipment and intellectual property, she noted.

Experts who spoke to Global News in January about the country’s productivity ills said Canada is a “significant laggard” behind the United States and other nations when it comes to equipping workers with “capital stock.”

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This can refer to infrastructure like roads, machinery to accomplish a task, research and development funding or even leveraging software — anything that makes a job easier and more efficient to perform.

“Imagine if I were working in construction with a shovel versus somebody working with a backhoe,” said Conference Board of Canada chief economist Pedro Antunes at the time.

Many economists, and the Bank of Canada, expected Canada’s productivity rates to accelerate in the recovery from the COVID-19 pandemic.  Rogers noted that while productivity has indeed taken off in the U.S., Canadian levels are on par with where they stood about seven years ago.

Canada is in the middle of the pack of countries in the Organisation for Economic Co-operation and Development (OECD) when it comes to productivity, according to a November analysis from BMO chief economist Doug Porter.

Rogers also pointed to a lack of competition across Canada’s industries as not driving companies to invest. When companies have high profit margins and feel their dominance in an industry is unchallenged, they have little incentive to make their operations more efficient, she argued.

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“Simply put, businesses become more productive when they’re exposed to competition,” she said.

“Competition drives companies to become more productive by innovating and by finding ways to be more efficient. In doing so, competition can make the whole economy more productive.”

Businesses also need more certainty in the Canadian policy environment to be able to invest confidently in their operations, Rogers added.

Government incentives and regulatory approaches that change year-to-year do not inspire confidence among business, Rogers said.

She noted that the pandemic and recent global trade tensions have been external sources of instability, and she said the Bank of Canada’s role is to ensure price stability in order to put businesses in an environment that encourages investment.

The Bank of Canada is set to make its next interest rate decision on April 10. Annual inflation has cooled to 2.8 per cent, according to the latest report but the central bank has said it wants confidence that inflation will cool all the way back to its two per cent target before it eases the policy rate from its current elevated levels.

One of the key metrics the Bank of Canada has consistently said it watches to help determine its interest rate path is the impact of wage growth. It is thought that businesses will pass on the costs of higher wage growth onto consumers, unless they come alongside gains in productivity that allow employers to raise wages without hiking prices.

Wage growth in the Canadian labour market has recently shown signs of easing, but annual rates were still above five per cent in StatCan’s the latest jobs report. The Bank of Canada has flagged annual wage growth between four and five per cent as inconsistent with achieving two per cent inflation if it doesn’t come with associated productivity gains.

Canada is also “too often” failing to make proper use of skilled newcomers joining the labour pool, Rogers said, which has major implications for productivity rates.

“And too often these people wind up stuck in low-wage, low-productivity jobs. Doing better at matching jobs and workers is crucial to the future of Canada’s economy,” she said.

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