One of Canada’s top bankers is concerned about a new crisis—a lack of productivity. In a speech delivered in Halifax this morning, Bank of Canada (BoC) Senior Deputy Governor Carolyn Rogers took aim at the country’s stagnating productivity. She warned the issue has caused Canada to fall behind and become less competitive than its economic peers, a problem that’s getting worse by the day.
Canada Is In The Middle of A Productivity Crisis, Warns Bankers
Economic productivity is the scale of output generated by a population. The more value a population is able to generate, the higher the odds of household prosperity. Rising productivity means faster growth, more jobs, and higher wages—while reducing the risks of inflation.
“That’s why I want to talk about Canada’s long-standing, poor record on productivity and show you just how big the problem is,” said the Deputy Governor.
Adding, “You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass.”
Canada Has Fallen Behind, Second Last In G7
Emphasizing the emergency, Rogers cited the country’s not so impressive track record. Despite being the youngest G7 with rapid population growth, the country is performing similarly to an older economy with no growth. The country has seen virtually no growth in recent years, with GDP per capita still around 2017-levels.
“And over the past four decades, we have actually slipped significantly compared with some other countries. In fact, relative to the United States, among G7 countries we are now second only to Italy when it comes to productivity decline,” said Rogers.
As we highlighted a few months ago, GDP per capita growth has been abysmal. Canada saw just 4.3% growth over the past decade. In contrast, the US advanced 47.4% over the same period. Yes, American output has seen a growth rate 10x Canada over the same period.
Canada Hasn’t Performed Well On Any Productive Growth Fronts
If Canada’s rapid population growth isn’t enough to drive productivity, what is? The Deputy Governor broke down drivers of growth into three areas—capital intensity, labor composition, and multifactor productivity.
Capital intensity: physical tools like machinery and equipment (M&E).
Labor composition: which includes the skills and training. While Canada has focused a lot on driving growth in trades to build housing, it’s neglected to foster other areas such as innovation.
Multifactor productivity: The interaction between the two and raising the efficiency of deployment.
She urged a greater focus on industries that add greater value, as well as making existing processes more efficient.
“Canada generally hasn’t performed well on either front. This needs to change if we want to ensure a stable and prosperous economy for everyone,” she said.
Canada Diverts Capital From Productivity To Housing, Investors Flee
The BoC cited investment in machinery & equipment (M&E), as well as intellectual property as the primary problem. A problem recently dismissed by policymakers as one resulting from increased interest rates. The Deputy Governor isn’t sold on that excuse, pushing back that this is a long-term issue.
“Weak investment has been a problem in Canada for a long time…investment levels were also weak in the years before the pandemic, when rates were much lower than today,” she said.
The BoC fell short of calling out the role of the country’s housing bubble, but it’s hard to deny. In economics, home prices are a category called “non-productive investment.” A home’s price can rise, but it doesn’t produce more goods and services as more capital is pumped into it.
It’s not surprising to see more and more capital flow from “risky” businesses and into state-backed housing. Housing has outperformed Canada’s capital markets in nearly every way. The incentive to invest in real estate has predictably diverted investment from M&E.
However, such a strong concentration is predictably isolating the country’s economy. Canada is failing to attract enough investment in its mortgage bonds, so much so it is now borrowing capital to inject into the market itself. At the same time, global capital is pulling their money out of Canada at a record pace to avoid exposure to a country that’s increasingly falling behind its peers.
But does anyone actually care? As investors have been pointing out—it’s almost time for rate cuts.
