Canada faces productivity "emergency"

BoC's senior deputy governor calls for urgent action to boost productivity and shield the economy from inflation

Canada faces productivity "emergency"

Carolyn Rogers, senior deputy governor of the Bank of Canada, highlighted Canada's productivity “emergency” in a speech delivered in Halifax, as reported by the Financial Post.

Rogers emphasized the critical need for Canada to address its declining productivity to shield the economy from future inflation drivers, such as the global trend away from globalization, changing demographics, the economic impacts of climate change, and global tensions.

She pointed out that an economy with robust productivity can sustain faster growth, generate more jobs, and offer higher wages without inflating prices.

Rogers noted the decline in Canada's productivity from producing 88 percent of the value generated per hour by the US in 1984 to just 71 percent in 2022.

This drop is attributed to weak investment over the past five decades, with the gap in capital spending per worker between Canadian firms and their US counterparts widening in the last decade.

According to Rogers, Canada has fallen behind most of its G7 peers in productivity, with only Italy experiencing a more significant decline relative to the US.

Addressing the urgency of the situation, Rogers said, “You’ve seen those signs that say: In emergency, break glass — Well, it’s time to break the glass.”

She advocated for increased competition and urged policymakers to prioritize sectors and companies that contribute more significantly to the economy. Rogers stressed the importance of setting the stage for heightened investment in technologies that enhance productivity and efficiency.

Rogers underscored the advantages of boosting productivity, noting that it leads to higher revenue for companies, which in turn allows them to offer better wages without raising prices. This improvement benefits workers, businesses, and central bankers alike.

She also called for attention to labor composition, including training and “re-skilling” for current workers, and optimizing the use of immigrant skills to avoid relegating new Canadians to low-wage, low-productivity jobs.

Rogers identified competition as her primary concern, pointing out that certain Canadian sectors lack competition from within other provinces, foreign companies, or new market entrants.

She argued that while protecting local businesses can be valid, excessive protection might hinder business investment.

Rogers advocated for creating more regulatory certainty and streamlining processes to boost business confidence and encourage investments that enhance productivity.

The Bank of Canada, she assured, will continue to focus on maintaining price and economic stability, fostering an environment conducive to risk-taking and productive investments.

“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,” Rogers concluded.