Need to improve Canadian productivity has reached emergency level: BoC

A senior Bank of Canada official says the need to improve productivity has reached an emergency level as the economy faces a future where inflation may be more of a threat than in the past few decades.

“You know those signs that say ‘In an emergency, break the glass?’ Well, it’s time to break the glass,” Bank of Canada senior deputy governor Carolyn Rogers said in a speech Tuesday.

Rogers said Canadian labour productivity eked out a small gain at the end of last year, but that came after six straight quarters where productivity fell.

She noted the U.S. has seen productivity gains coming out of the pandemic as firms found their footing, but Canada has not seen the same.

“In fact, the level of productivity in Canada’s business sector is more or less unchanged from where it was seven years ago,” Rogers said.

The need to improve productivity comes as Rogers said many of the forces that helped create a benign environment for inflation in the past are going to fade away, or even reverse. 

“We know that changing demographics and the economic impacts of climate change will tend to put upward pressure on prices. Persistent global trade tensions also raise the risk of future inflation,” she said.

The Bank of Canada’s next interest rate decision and monetary policy report is set for April 10.

Inflation has been cooling in recent months, coming in at an annual rate of 2.8% in February.

Economists will be watching to see what the central bank, which is targeting an annual inflation rate of 2%, will have to say about cuts to its key interest rate target.

Rogers said Tuesday that productivity is a way to inoculate an economy against inflation.

“An economy with low productivity can grow only so quickly before inflation sets in. But an economy with strong productivity can have faster growth, more jobs and higher wages with less risk of inflation,” she said.

Canada’s lagging productivity has been a chronic problem.

Rogers said when you compare Canada’s recent productivity record with that of other countries, what sticks out is how much the country lags on investment in machinery, equipment and intellectual property.

She also said Canada needs to focus on making sure the training and education we provide teach the skills we need, while a more competitive business environment would help drive greater innovation and efficiency.