Firms boosting output

OTTAWA — Is Canada turning the corner on the productivity agenda?

OTTAWA — Is Canada turning the corner on the productivity agenda?

The latest data from Statistics Canada suggests that after years of lagging far behind, especially in comparison with the U.S., and much hair-pulling from policy-makers, the country may be on the verge of a productivity payoff.

Canada’s productivity, defined as output per unit of hour worked, outpaced the U.S. for the first time in five years in 2011, advancing 1.1 per cent in the fourth quarter above the corresponding period in 2010, as opposed to the 0.1 per cent gain south of the border.

What stood out in 2011 was what occurred in the second half of the year. Following a dip in the second quarter caused by disruptions following the earthquake in Japan, productivity in Canada steamed ahead at about 2.5 per cent annualized.

Economists, who have long bemoaned Canada’s productivity record, are not ready to pop the champagne, but say the improvement is encouraging.

“It’s the long-term trends that matter and when you look at productivity in Canada, we still have a decade of catch-up to do, but hopefully we are seeing a reversal starting,” said Jack Mintz, chair of School of Public Policy at the University of Calgary.

Mintz pointed out that Canadian firms have dramatically hiked spending on new machinery and equipment over the past two years and some of those investments may be paying off.

That’s not necessarily all a good thing from a worker’s point of view. Part of the recent boost coincided with a stall on the job creation front, which may signal that firms are seeking to boost output through efficiencies rather than increased hiring.

“The improvement in productivity is good news, but what we really need is improved productivity in tandem with strong job growth,” said Douglas Porter, deputy chief economist with the Bank of Montreal.

Still, analysts say Canada needs to become more productive and competitive in order to prosper.

The Bank of Canada has had productivity on its radar screen for years, and has often chided businesses on their lack of investments in machinery and equipment.

In a speech in 2010, governor Mark Carney bluntly told a business audience that Canada has two problems — an aging boomer generation which will slow labour growth and low productivity.

“The combination . . . could well mean that the average rate of potential growth for the Canadian economy will be closer to two per cent going forward than the more than three per cent we’ve enjoyed,” he said.

One percentage point less growth doesn’t sound like much, but thanks to compounding, the difference for the average worker is a loss of almost $30,000 in income in just 10 years.

Finance Minister Jim Flaherty is expected to take another run at the productivity issue in his March 29 federal budget, although it will be called “innovation,” since for many productivity has a negative connotation of more work for less pay.

Using last fall’s Tom Jenkins report as a guide, Ottawa is likely to tackle the way $3.5 billion in tax credits are doled out under the Scientific Research and Experimental Development program, aiming to link funding more closely to commercialization of research. The budget is also likely to make innovation a criteria for government procurement.

The central bank has been kinder to businesses recently, giving the corporate sector credit for stepping up investments. In its January economic review, the bank highlighted business spending as a key contributor to growth in 2012 and 2013.

Scotiabank economist Derek Holt says it would be encouraging if the recent productivity gains were a direct payoff of the bump in business investment in machinery and equipment that began in 2010.

But he says even if that is the case, he doubts that will be sufficient to supplant the U.S., Japan and some of the leading European countries in the race for the most productive and competitive economy.

“Strong business investment is one of the things that would drive productivity,” he explained. “But technology adoption is also important and we have a real problem (on that front), and our labour market is not as fluid as it is in the U.S.”

As well, Statistics Canada and economists like Mintz have noted that the make-up of the economy — with its heavy weighting on natural resources and smaller companies — works against it in comparison to the U.S. The oil sector is especially viewed as a drag, said Mintz, because it takes years for exploration and investments to show up as increased production.

Mintz said it is too early to tell whether the recent uptick in productivity is due to capital investments, but added: “It’s reasonable to think (investments are) probably going to start translating into better productivity and that’s a good thing.”

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