Outlook 2007: Productivity

Six of Canada's foremost economists forecast the coming year


Six of Canada's foremost economists forecast the coming year

Outlook 2007:ÂÂ The global picture Â|Â Canada, by province Â|Â Oil Â|Â Real estate Â|Â ProductivityÂ|Â Canada and Asia
ÂÂ Roger Martin Â|Â John Shackleton Â|Â Bill Morris

Previous projections:ÂÂ Outlook 2006 Â|Â Outlook 2005 Â|Â Outlook 2004

Concerned about the increasingly lethargic state of the nation, the federal government ran an ingenious advertising campaign to encourage Canadians to get off their couches and get into shape.

The original ParticipACTION campaign–which aired during the 1970s–starred a 60-year-old Swede who effortlessly kept pace with wheezing Canadians half his age. The implication was clear: if Canadians failed to get fit, the world might pass us by. The message apparently got through; it encouraged many to pursue a more active lifestyle.

A similar message is required today. But this time it's about the economy. Our productivity level, which measures the amount of resources required to produce a product or service, is stagnating. That means that increases in “inputs”–such as capital, labour and raw materials–produce barely more “outputs.”

For the past five years, the output per hour in the Canadian business sector grew only 1% per annum, down from 2.4 % in the previous five years.

Not surprisingly, Canada has lost ground to international competition. Our business productivity peaked relative to the U.S. at 91.4% in 1984–and has since fallen to 74%. Moreover, we are slipping relative to many members of the Organization for Economic Co-operation and Development (OECD). Four decades ago we ranked third. Now we're 17th.

Most Canadians probably don't lose much sleep over this. Here's the crux: Productivity is inherently a difficult subject to communicate because it is not directly observed or measured. It receives little media attention relative to other indicators such as employment or gross domestic product. If anything, Canadians often associate productivity with job losses, or working harder for less pay. Others, such as OECD chief economist Jean-Philippe Cotis, believe Canadians are just too happy with their current state to worry about the future.

We should not be so complacent. Productivity is intrinsically tied to our national wealth and well-being. Weak or languishing productivity levels deplete the resources available to fund public services, such as our health-care system or environmental programs. It reduces our ability to invest in critical infrastructure, and discourages investments that can lead to new, high-paying jobs. Productivity ultimately determines Canadians' real wages.

It impacts everyone in very real ways. For instance, the productivity gap between the United States and Canada represents $6,100 of forgone annual disposable income per Canadian. As Roger Martin, dean of the University of Toronto's Rotman School of Management, recently warned in an interview: “The stealthily slow drift of underachievement could erode our economic strength before we know it.” If we fail to enhance our productivity level, Canada's standard of living and many aspects of our quality of life will deteriorate to the lowest of international benchmarks.

Argentina illustrates the long-term consequences of an unproductive economy. Its anemic growth rate–brought on by excessive public spending, mounting deficits, nationalized industries and a closed economy–is at the root of many formidable problems, including hyperinflation. This has led to serious social ills, particularly for the most vulnerable, who have seen the value of their savings and salaries diminish and, in some cases, disappear.

Such a scenario is unlikely in Canada. Governments have taken some positive steps to address stagnating productivity. Of particular note, the introduction of Finance Minister Jim Flaherty's “Advantage Canada” economic blueprint is a strong signal that the federal government recognizes the challenge. Still, many politicians–not to mention much of the public–aren't as seized with the productivity conundrum as economists, whose broad consensus underscores the urgency of the issue.

What can be done? The public and private sector could champion a productivity agenda that conveys its importance to Canadians' well-being. Elements of this agenda would include: reduction in the federal debt-to-GDP ratio; elimination of interprovincial trade barriers; removal of foreign ownership restrictions in key sectors; cutting the tax rate on capital; aligning immigration and economic objectives; and greater investments in infrastructure, education and knowledge industries. All vital, but not exactly the stuff Canadians get passionate about.

This brings us back to the federal government's campaign to encourage our nation to become more active. Undoubtedly, the image of a gasping Canadian bruised our collective ego. But it put the problem into terms we could understand. It had a positive impact for its time.

Canada's sluggish productivity level presents a new challenge–one that is best left to communications experts to package and sell. But the theme remains the same: Our nation is losing ground to international competitors. It's time to pick up the pace.

Don Drummond is senior vice-president and chief economist at TD Bank Financial Group in Toronto