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How to fix Canada's poor productivity performance

by SuperiorInvest

Rosenberg Research: Bank of Canada will have to cut rates harder and faster than it thinks if productivity is not addressed

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By Atakan Bakiskan

In her speech on Tuesday, Bank of Canada Senior Deputy Governor Carolyn Rogers said it is time to “break the emergency glass” regarding the structural decline in Canadian productivity.

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Real output per hour worked (labor productivity) in Canada has declined in 12 of the last 14 quarters and is now back to where it was in the fourth quarter of 2019. What is more worrying is that the drop in productivity from levels pre-pandemic is not due to a handful of industries, but is quite widespread in all goods-producing sectors, with one exception in agriculture/forestry/fisheries.

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For some perspective, on an hourly basis, an average Canadian worker produces about 70 percent of the output of an American worker (up from 88 percent in 1984). Although labor composition (the skills of workers) and lack of market competition are behind Canada's poor productivity performance, the main problem remains incredibly weak capital investment (i.e. capital intensity). .

In terms of volume, Canada has had the same level of investment in machinery, equipment and intellectual property (which are key to productivity growth) for almost the last two decades.

Productivity is the key to a high-growth, low-inflation environment, where living standards are constantly rising. Without a rebound in productivity, the Canadian economy will not have structural and sustainable economic growth.

Canada's suffering from low productivity has its remedies. One of the proposals Rogers proposes is for Canada to invest in industries that generate the most output per hour worked, such as mining, oil, gas and utilities. Although these two industries have the highest productivity levels, the growth here is not too great: mining is down 0.7 percent from its level in the fourth quarter of 2019 and utilities are down 7.4 percent. The only productivity increase occurred in services (and agriculture), which comprise the least productive industries (such as accommodation/food services and retail trade).

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Other remedies include increasing competition, improving worker skills, reducing excessive regulation, correcting long-standing interprovincial trade barriers, equalizing efficiency in the labor market and, of course, greater business investment.

An immigration policy that produces positive multiplier economic impacts would also go a long way toward reversing Canada's dismal productivity record. It is evident that the country is not adequately integrating new immigrants into the workforce or attracting workers to value-added industries.

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A declining productivity path not only prevents the economy from achieving stable non-inflationary growth, but also reduces the neutral rate (the equilibrium interest rate where inflation is stable and there is full employment).

So, as the slowdown in the Canadian economy continues, inflation continues to decline and productivity declines, the Bank of Canada will have to cut rates harder and faster than it thinks.

Atakan Bakiskan is an economist at the independent research firm Rosenberg Research & Associates Inc., founded by David Rosenberg. To receive more insights and analysis from David Rosenberg, you can sign up for a free one-month trial at Rosenberg Research. website.

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