Canadian Productivity Plummets: Two Quarters of Decline Raise Economic Concerns
Labour productivity in Canadian businesses experienced a decline of 0.2 per cent during the second quarter of 2024, with eleven out of sixteen major industries recording decreases, according to a report released by Statistics Canada on Thursday. This downward trend represents a continuation of a concerning pattern, as productivity has fallen for two consecutive quarters, with an annual decrease of 0.7 per cent. Economists are increasingly focused on this issue, recognizing it as a ‘whole economy issue’ rather than a sector-specific concern.
The decline in labour productivity raises significant questions about the long-term economic well-being of Canada, directly impacting disposable income and the standard of living for Canadians. Several factors contribute to this situation, including persistent low productivity growth compared to other developed nations. A key factor is the increasing hours worked in the business sector, which rose by 0.6 per cent during the same period, yet failed to offset the drop in output. This highlights the need for increased efficiency alongside a greater workforce. The service-producing sector was particularly affected, with declines seen across industries including information and cultural industries (-2.1 per cent), real estate services (-1.5 per cent), and professional services (-0.9 per cent).
Experts emphasize the importance of considering productivity trends prior to the COVID-19 pandemic, as disruptions during that time have significantly skewed the data. Pedro Antunes, chief economist at the Conference Board of Canada, notes that Canada’s long-standing struggle with productivity growth predates the recent pandemic. Historically, the construction industry has often been a low-productivity sector, and current challenges related to supply constraints exacerbate this issue. With substantial investments being directed toward housing construction – particularly in the face of rapid population growth – there are concerns that this focus may be diverting resources away from more productive ventures. This situation is further complicated by the fact that Canada consistently lags behind the United States and other developed economies in terms of productivity growth.
The United States’ productivity has outpaced Canada’s by 10 per cent over the past five years, and Canada’s position within the Organisation for Economic Co-operation and Development (OECD) continues to decline. GDP per capita, a key measure of the standard of living, also experienced its fifth consecutive quarterly decline during the second quarter of 2024. Douglas Porter, chief economist at Bank of Montreal, underscored the severity of the situation, stating it’s “not a problem confined to one region or sector – say manufacturing. It is a whole economy issue.” Porter highlighted Canada’s struggles relative to the U.S., where investment in machinery, equipment, and structures has generally kept pace with labour growth – a critical element for boosting productivity.
Canada’s productivity slump has drawn particular attention from the Bank of Canada, which, as noted by senior deputy governor Carolyn Rogers in a speech delivered earlier this year, has identified it as a serious emergency. The bank’s concerns revolve around insufficient private investment—the ratio of capital spending to GDP remains low. Furthermore, Canada’s GDP per capita declines paint a concerning picture for the standard of living. Industries such as transportation and warehousing (-9.4 per cent), construction (-11.5 per cent) and utilities (-13.5 per cent) also reported large declines compared to 2019.
The situation has prompted calls for fundamental changes in Canada’s approach to investment and innovation. Economists suggest a redirection of resources toward sectors with higher growth potential and greater productivity gains. Moreover, policy makers need to address the structural factors that contribute to the country’s productivity challenge, including an antiquated regulatory environment, a lack of competition in certain industries, and a slow pace of technological adoption. The continued decline in Canada’s productivity underscores the urgency of tackling these issues to ensure a sustainable and prosperous future.
