Productivity upturn underway

Written by Stephen Poloz

No one questions the need for Canadian companies to boost productivity. But many disagree on whether the ingredients for a productivity upturn are already present, or need to be created.

Arguably, the essential pre-conditions already exist for a productivity upturn. Global economic conditions are solid. Most commodity markets are strong. The economy is operating near its full capacity, which means that companies cannot blame weak demand for lagging productivity. Interest rates remain low and banks are willing to lend. And the Canadian dollar is well above its average for the past five years — a double-barreled influence as it puts pressure on companies to cut costs and reduces the price of imported productivity-enhancing equipment at the same time.

So what do the latest data indicate? Overall Canadian productivity growth remains dismal. As of the second quarter of 2005, total productivity growth in Canada amounted to 0.6% compared to a year earlier. Admittedly, achieving any increase in productivity is somewhat encouraging, as the economy saw overall productivity actually decline slightly during the second half of 2003 and early 2004. But the fact remains that productivity in Canada is at about the same level as it was back in the first quarter of 2003. In contrast, the economy generated productivity growth of between 2-4% during most of the preceding five years, except during the near-recession of 2001.

Where is this weak performance coming from? The construction sector continues to see its productivity decline, as it has done through the boom in activity of the past three years. Fortunately, productivity seems to be bottoming out in that sector, as demand pressures have begun to ease to some extent. Another sector with negative productivity growth in the past year is finance and real estate — activity is moderating, and it will take awhile for staffing to be adjusted.

But productivity growth in the manufacturing sector has picked up strongly, to around 5% so far in 2005. This is despite the fact that capacity utilization in the sector has been pretty steady, between 86-87%, for four quarters running. From mid-2003 until mid-2004, manufacturing capacity utilization rose from about 80% to 86%, and an upshift like that will almost always lead to a large increase in measured productivity. But the fact that productivity growth has continued at around 5% into mid-2005 with capacity utilization holding steady is a very positive sign.

Part of this increased productivity in manufacturing is coming from higher rates of investment spending. A good proxy for this spending is imports of machinery and equipment, which are running at a rate of 5.7% higher than last year. This is well above Canada’s economic growth rate, and when one takes account of the lower cost of imported machinery due to the stronger dollar, volumes of machinery imports are actually growing at a very robust 16.4% pace.

The bottom line? Canada is still a long way from generating a productivity upturn such as that witnessed in the U.S. But many of the ingredients are there, and so are the beginnings.

October 20, 2005

The views expressed here are those of the author, and not necessarily of Export Development Canada.

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