The Bank of Canada keeps hammering it home. Labor productivity is not going in the right direction. The absence of a trend reversal makes the current wage growth, in the range of 4% to 5%, incompatible with a return of inflation to the 2% target.
On March 9, before the Manitoba Chamber of Commerce, Senior Deputy Governor of the Bank of Canada, Carolyn Rogers, highlighted Canada’s good position within the G7 in terms of GDP growth, inflation and employment. To then warn that “we continue to have one of the lowest productivity growth rates among the G7”.
The central bank maintains its warning. “Unless productivity growth becomes surprisingly strong, it will not be possible to meet the 2% inflation target if wage growth remains within this range,” or between 4% and 5%. “Well, last week’s data shows that labor productivity in Canada has declined for a third straight quarter,” said Carolyn Rogers.
For the Bank of Canada, productivity gains are a key element of potential output growth and therefore of a sustainable non-inflationary expansion of the Canadian economy. It also has an impact on marginal costs, a determinant of the price level. And productivity gaps between sectors and between countries affect the real exchange rate, she has already explained.
The reality on the ground
But on the floor of the cows… In its look at the three years of the pandemic, Statistics Canada measured that after having increased sharply at the start, labor productivity in Canada fell for seven consecutive quarters before increasing in the second and in the third quarter of 2022. In the meantime, unit labor costs jumped 13% from the pre-COVID-19 baseline.
In its data released earlier this month, the agency added that corporate labor productivity fell 0.5% in the fourth quarter, the third straight decline. This decline mainly reflects the contraction in business production observed after five quarters of growth, while hours worked continue to increase, but at a much slower pace.
Unit labor costs — that is, per unit of output — in these companies rose for a fourth straight quarter. The 1.1% increase measured in the fourth quarter reflects the growth in average compensation per hour worked combined with the decline in productivity.
Between the fourth quarters of 2019 and 2022, labor productivity declined by an average of 0.1% per quarter. In Canadian businesses, for 2022 as a whole, it fell 1.5% after posting a historic decline of 6.2% in 2021 and a record growth of 8.8% in 2020 due to the impact of the pandemic, summarizes Statistics Canada.
Investment intentions are nevertheless well felt.
The analysis firm Oxford Economics notes that forecasts for non-residential capital expenditure suggest a 4.3% increase this year, at a rate however much lower than that of 11.2% calculated in 2022 and 10.3 % in 2021. For this year, the increase in capital expenditure should reach 5.2% in the private sector and 2.7% in the public sector. In the case of the private sector, spending on machinery and equipment would increase by 6.2%, compared to 4.5% for spending monopolized by non-residential construction.
In total, Oxford notes, 14 of the 20 sub-sectors say they want to increase their capital expenditure this year. But the bulk of the intentions comes from mining, oil and gas, with an expected increase of 13.7%, which would add to the 24.3% seen in 2022, and which would account for about half of the total increase expected this year in the private sector. So much for the intentions.
In reality, one should rather expect a decline in private investment of 1.5% under the effect of the rise in interest rates, high costs of labor and materials and the slowdown in the economy. economic activity, Oxford tells us. The bulk of the impact manifests itself in the investment in machinery and equipment.
Shrinking manufacturing capital stock
Stéfane Marion, Chief Economist and Strategist at National Bank, offered an interesting perspective. “Canada currently has 15 free trade agreements with 51 different countries. Together, these agreements cover 1.5 billion consumers worldwide. One would think that Canadian manufacturers would strive to invest in order to benefit from such market access. Alas, this is not the case. »
Describing the finding as disturbing, he adds that, “according to Statistics Canada, investment in the manufacturing sector is so low that it fails to compensate for the depreciation of existing machinery and installations”.
“As a result, last year’s capital stock was actually lower than when the first free trade agreement with the United States entered into force, in 1989. This situation contrasts with that of the United States, where the stock of capital is at an all-time high,” he notes.