Global growth fuels domestic productivity

(April 25, 2005) The Canadian economy should experience an upsurge in productivity in 2005 and 2006, according to Export Development Canada (EDC). The agency calls Canada’s sluggish productivity growth “the one blemish on an otherwise spotless economic record.”

“The first phase of productivity improvement is already in place as the expansion of 2004 enabled many companies to mop up their idle capacity,” says Stephen Poloz, EDC senior vice-president and chief economist. “Increases in profitability, low borrowing costs, a healthy stock market and strong lending capacity set the stage for the second phase of an upswing.”

The EDC report says the high demand for Canadian resources has driven the dollar higher, making it cheaper for Canadian firms to import new productivity-boosting equipment.

“Canadian companies are well positioned to duplicate the productivity miracle pulled off by the U.S. manufacturing sector,” says Mr. Poloz. “U.S. company use of foreign suppliers has greatly increased within-company trade, permitting greater specialization and productivity at home. The time is now ripe for Canadian companies to activate similar strategies.”

EDC predicts the Canadian dollar will settle at about 77 cents US by the end of 2005 and could weaken further through 2006 as energy prices tail off.

EDC economists predict annual global growth rates of 4.2% and 4.1% for 2005 and 2006, respectively. Canada’s economy is expected to grow by 2.4% in 2005 and 2.9% in 2006.

Asia-Pacific will remain the strongest region, with economic growth expected to hit 7.1% in 2005. China and India should remain the big stories in this region, with China cooling from to 8.6% in 2005 from 9.5% in 2004, while India will rise 0.1% to 7% growth.

The developing world as a whole shows lower risk than any time in the past eight years, making it a prime target for Canadian exporters.

While Canada’s productivity is seen improving, the EDC report says export growth will slow in 2005 and flatten out in 2006. Exports of telecom equipment and machinery are expected to improve, but the value of resource exports could drop, affecting the energy, minerals and forestry sectors.

“Canadian exports rebounded in 2004 after three years of declining sales,” says Poloz. “Higher raw material and energy costs in the second half of 2004 and the appreciation in the Canadian dollar have made for a tougher business environment. While those challenging conditions will continue through 2005, productivity improvements will enable exporters to hold their own.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com