Bank of Canada Governor Tiff Macklem has sounded the alarm about Canada’s productivity problems, urging policymakers to take a closer look at why the country is suffering from sluggish business investment.
According to a prepared speech delivered to the Winnipeg Chamber of Commerce on Monday, Macklem praised the strengths of Canada’s job market, including high workforce participation rates, strong immigration and a stable education system.
The Governor also reflected on the fact that the labor market has adapted relatively well to rising interest rates, even though some workers, including new entrants and young people, have been hit hard by rising unemployment.
But looking at the longer-term economic picture, he warned that productivity is the country’s weak spot, noting that on average, Canadian companies invest much less per worker than their U.S. counterparts.
“Our weakness is productivity. We’ve been very successful at growing the economy by adding more workers, but we’ve not been as successful at increasing output per worker,” he said.
The governor’s comments echoed a central message from Lt. Gov. Carolyn Rogers in a March speech, in which she warned that addressing low productivity has become a national emergency.
The productivity issue is a top priority for many economists, who worry that sluggish business investment will drag down the country’s living standards.
Macklem said finding ways to make Canada a better investment destination is important to support non-inflationary economic growth and rising standards of living.
He said increased productivity would help companies compete in global markets and support higher wages for workers.
“With an ageing population and limits on the number of immigrants we can accept each year, productivity gains will be even more important to maintaining trend growth,” Macklem said.
Discussion needed
At a press conference late Monday, the governor acknowledged that the solution to Canada’s productivity problems is not in the central bank’s hands.
“But our message is that if we want more non-inflationary growth, we need a concerted discussion between business, government, academia and civil society about how to boost productivity growth in Canada,” he said.
Macklem cited several areas policymakers need to address, including inter-provincial trade barriers and delays in regulatory approvals in Canada.
The governor’s comments came less than three weeks after the Bank of Canada cut interest rates for the first time in more than four years.
Encouraged by slowing inflation, the central bank cut its benchmark interest rate by 0.25 percentage point to 4.75 percent.
Macklem reiterated on Monday that it was “reasonable” to expect further rate cuts if the economy and inflation progress broadly in line with the central bank’s expectations.
Canada’s inflation rate was 2.7 per cent in April. Inflation data for May is due to be released by Statistics Canada on Tuesday.
High interest rates have slowed the economy and dampened the job market.
The unemployment rate has risen steadily over the past year, reaching 6.2% in May.