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 inflation 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.
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Some global risks to Canada’s inflation remain: Macklem
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.
Rogers pointed to a lack of competition across Canada’s industries as not driving companies to invest.
“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.”
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Businesses also need more certainty in the Canadian policy environment to be able to invest confidently in their operations, Rogers added. Canada is also “too often” failing to make proper use of skilled newcomers joining the labour pool, she 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.
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.
