The Bank of Canada is warning that the country is at risk of facing even higher inflation if the economy continues to see low productivity.
“An economy with low productivity can grow only so quickly before inflation sets in. But an economy with strong productivity can have faster growth, more jobs and higher wages with less risk of inflation,” said Carolyn Rogers, senior deputy governor for the central bank during a speech in Halifax on Wednesday.
Rogers added that other catalysts of inflation include Canada’s rapidly changing demographics, global tensions and the impacts of climate change.
Canada’s productivity has steadily been in decline since the 1980’s when compared to the United States.
In 1984, Canada produced 88% of the value generated by its US counterpart per hour, however in 2022, it only generated 71%.
While Canada has consistently faced problems of weak investment over the past 50 years, the gap between the level of capital spending per worker by Canadian firms compared to US firms has only widened in recent decades.
“While U.S. spending continues to increase, Canadian investment levels are lower than they were a decade ago,” said Rogers.
Canada has now fallen behind most of its G7 peers, only beating out Italy in terms of a larger productivity decline relative to the US.
“You’ve seen those signs that say: In emergency, break glass — Well, it’s time to break the glass,” she said.
Rogers proposed increasing competition as one of many solutions required, urging policymakers to emphasize companies and sectors which provide great value to the economy. She added that by making them a priority, it would set the stage for increased investment, especially in areas like technology that will improve efficiency in productivity.
“When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers without having to raise prices,” said Rogers.
“The bottom line is that the benefits from raising productivity are there no matter what your role is: for workers, for businesses and, yes, for central bankers, too.”
Additionally, Rogers would like to see policymakers focusing on labour composition, including training and “reskilling” existing workers to improve Canada’s productivity.
She also said now is the time for Canada to be taking advantage of immigration.
“Too often, new Canadians are working in jobs that don’t take advantage of the skills they already possess. And too often these people wind up stuck in low-wage, low-productivity jobs,” she said. “Doing better at matching jobs and workers is crucial to the future of Canada’s economy.”
However above all, was the need for competition, particularly in sectors where Canada doesn’t currently face competition from firms in other provinces, new entrants or foreign rivals, noted Rogers.
“Of course, every country has certain sectors that it champions, and there can be valid reasons to protect local businesses,” she said. “However, too much protection can lead to problems. It can also help to explain Canada’s weak record in business investment.”
She urged policymakers to create additional regulatory certainty to speed up processes that would allow businesses to make the kinds of investments that improve productivity with confidence.
“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,” said Rogers.
