Weak Productivity Growth Canada’s ‘Achilles Heel’: Bank of Canada Governor

Bank of Canada governor Tiff Macklem holds a press conference at the central bank in Ottawa on July 12, 2023. The Canadian Press/Sean Kilpatrick

Canada has a long-standing productivity problem that is quickly reaching “emergency levels,” says Bank of Canada governor Tiff Macklem.

The central bank’s top boss called for change during a June 24 speech before the Winnipeg Chamber of Commerce, saying it’s imperative that Canada addresses its ongoing struggle with low business investment.

“Our Achilles heel is productivity,” Mr. Macklem said in his prepared remarks. “We have been very good at growing our economy by adding workers. We have been much less successful at increasing output per worker. And this is catching up with us.”

While Canada managed to make up for its lagging productivity from 2000 to 2019 with strong labour force growth, the country’s gross domestic product (GDP) growth has been weak compared to the United States since the pandemic, he said.

Canadian businesses invest significantly less per worker than U.S. businesses, Mr. Macklem said, meaning workers have fewer new innovations to help them work more quickly and efficiently.

“Why have we had systematically less investment in Canada than in the United States? Or, to put this question in the positive: How do we make Canada more investable?” he said. “Finding answers to these questions is critical if we want to increase the non-inflationary growth rate of the economy and raise the standard of living of Canadians.”

Canada has been growing its economy by adding workers, he said, noting that the country needs “more than one engine.”

“Moving forward we need to play to our strengths—growing our labour force—while we tackle our weaknesses: investment and productivity.”

Inflation

The speech was Mr. Macklem’s first since the Bank of Canada cut the country’s key interest rate by a quarter of a percentage point on June 5, to 4.75 percent—the first interest rate cut in more than four years.

Mr. Macklem said at the time that Canada had “come a long way in the fight against inflation,” but that the bank would be watching inflation rates before making further rate cuts.

Canada’s annual inflation rate rose to 2.9 percent in May, up from 2.7 percent in April, Statistics Canada reported on June 25. The increase was largely driven by the 4.6 percent rise in the price of services.

Today’s inflation reading, along with the upcoming June inflation data, is expected to play a key role in the central bank’s next rate decision, set for July 24.

The increase could be bad news for those hoping for another interest rate cut next month, economists say.

“No bones about it, this is not what the Bank of Canada wanted to see at this point, and clearly shaves the odds of a follow-up July rate cut,” BMO chief economist Douglas Porter said in a June 25 note to investors.

“With inflation back on a bumpy path, the outlook for BoC moves is similarly bumpy. For now, our official call remains that the next BoC rate cut will be in September, and this report does nothing to move that needle.”

CIBC economist Katherine Judge agreed, saying inflation moving in the wrong direction in May is likely to impact the central bank’s decision. She noted that one of the Bank of Canada’s preferred core measures was also higher than expected, with the Consumer Price Index median rising two points to 2.8 percent year-over-year.

“There is one more CPI print before the July [bank] meeting and a plethora of other economic data,” she wrote on June 25. “While this print clearly tilts the risks towards fewer cuts than the three more that we have pencilled in for the year, policymakers are in data dependent mode and will need to see a wider set of data in order to determine if the acceleration in CPI in May was an anomaly or the start of a trend.”

Inflation has remained below 3 percent since January, Mr. Macklem noted in his June 24 speech, adding that the bank expects inflation to move closer to the bank’s 2 percent target as the year progresses.

“Low, stable, and predictable inflation allows Canadians to spend and invest with confidence. It lowers uncertainty and encourages long-term investment,” he said. “And it contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living. That’s why price stability is our number one priority.”