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Weak Investment and Productivity Pose Threat to Canada, Report Warns

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Weak Investment and Productivity Pose Threat to Canada, Report Warns
Weak investment and productivity will continue posing a threat to Canada’s economy over the long term, despite interest rate cuts providing some relief, according to a new report by the professional services firm Deloitte.

“Canada’s chronically weak productivity and significant increases in unit labour costs are creating risks that inflation may stay above the Bank of Canada’s target range for longer, as large wage increases without productivity gains are inflationary,” said the report titled “Hurdles remain amid signs of recovery.”

The report said that after three years of “economic upheaval” that saw the Bank of Canada raise interest rates from 1.5 percent to 5 percent following the COVID-19 pandemic, the central bank has begun easing its policy stance to start “paving the way for stronger economic growth.”

On June 5, the Bank of Canada cut its interest rates for the first time in more than four years, bringing its key rate to 4.75 percent, in response to inflation falling to 2.7 percent in April from 3.4 percent in December.

While the Deloitte report said this rate cut was a relief for households, problems remain with Canada’s economy. It pointed out that Canadian households are the most indebted in the G7, while consumer spending per person has fallen in five of the last seven quarters.

The report also says that productivity remaining flat while labour costs increased by over 30 percent is an “unsustainable” situation, and that more business investments are key to boosting labour productivity.

Additionally, the report said while labour shortages were an issue in 2023, a rapid growth in immigration has led to Canada’s economy struggling to create enough jobs.

Bank of Canada Governor Tiff Macklem has also warned about Canada’s productivity problem, which he recently said is reaching “emergency levels” and is Canada’s “Achilles heel.” He told the Winnipeg Chamber of Commerce on June 24 that while the country had been good at bringing in more workers, it had been less successful at increasing output per worker.

“Why have we had systematically less investment in Canada than in the United States? Or, to put this question in the positive: How do we make Canada more investable?” Mr. Macklem asked. “Finding answers to these questions is critical if we want to increase the non-inflationary growth rate of the economy and raise the standard of living of Canadians.”

Former Bank of Canada governor Mark Carney also warned in April that Canada’s prosperity would be harmed unless Ottawa manages to raise productivity, saying the government has “less to spend because we have become less productive.”

“And unless we turn that around, Canadian prosperity for all Canadians will be severely compromised. Because we can’t redistribute what we don’t have,” Mr. Carney said during an April keynote address at Canada 2020’s Economic Lookahead dinner in Toronto.

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