Today's economy

Canada’s productivity gap

By Kevin Press, BrighterLife.ca

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Paul Jenkins, senior deputy governor of the Bank of Canada added his name to the list of national leaders drawing attention to our country’s lagging productivity numbers this week. In a speech delivered to The Economic Club of Canada in Toronto, Jenkins emphasized the need to invest “in modern, productivity-enhancing equipment and structures.

“Our track record in this regard has not been impressive, even adjusting for the cyclical factors and uncertainties of the past two and a half years,” he said. “Compared with previous decades, productivity growth has weakened substantially in the past 10 years.”

What does this mean? In simple terms, productivity is a measurement of how efficiently a country turns inputs (labour and technology for example) into consumable outputs. Productivity is an important indicator of economic performance. As a country boosts its productivity, living standards improve.

It’s also a useful way to compare our potential for economic growth to that of other countries. This chart, produced by the Organization for Economic Co-operation and Development (OECD) shows that Canada’s productivity in 2007 was above the OECD average but lagged that of the U.S., U.K. and 13 other OECD countries.

Chart by: Organization for Economic Co-operation and Development

Chart by: Organization for Economic Co-operation and Development

What is Jenkins calling for? He believes that coming out of the recession, Canadian organizations are better positioned to invest in their businesses than many of their competitors around the world. And that’s what he wants to see happen.

“With our trading partners, including the United States, continuing to invest and make strong gains in productivity growth, it is all the more imperative that firms in Canada make concerted efforts to boost productivity,” he said. “Corporate balance sheets in Canada are healthy. Profitability is good, with the ratio of profits to GDP back to its long-term average of 10%. Leverage (i.e., debt-to-equity) ratios are low and liquidity levels are high. Corporate tax rates have declined. Absolute borrowing costs are low. And while the non-price terms for borrowing have been a restraining factor, our Senior Loan Officer Survey indicates that these terms are beginning to ease as the recovery takes hold. From this perspective, then, there should be little holding corporations back from modernizing their capital stock.”

That modernization will come in the form of technology investments, smarter production processes and other forms of innovation.

To what extent should all of this inform investment decisions? Given where we rank relative to the OECD average, I don’t think there’s a strong signal here to change the percentage of your portfolio invested in Canada.

On a company-by-company basis however, it is useful to make this part of your investment research. For example, Canadian companies in the construction and natural resource sectors are more productive than their U.S. counterparts. When considering a Canadian investment, it only makes sense to learn all you can about the industry the organization is in, its investment in technology, commitment to research and development and more. These will impact future returns.

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Doug Michaelides on

An important issue to consider when examining Canada’s productivity gap is Science and Technology policy. To close the gap, we need to take a number of steps to improve our S&T innovation and commercialization effectiveness. Read more about some proposals in this area at http://stratfordmanagers.com/blog/ .

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