A full four years after the financial crisis nearly ground the global economy to a halt, Canadian gross domestic product (GDP) growth continues to disappoint. After coming in just above 3% in 2010, it slipped below that mark in 2011. This year’s annual growth rate is expected to fall further, below 2%.
What gives? Are we still feeling the effects of the 2008/2009 downturn? Is this simply a result of a tough global economy that’s seen a weak recovery in the U.S., a second recession in the eurozone and a slowdown in key emerging economies like China? Or is there something more fundamental to the Canadian economy at work here?
In a piece I posted last month, Six predictions for the Canadian economy, TD Economics’ Diana Petramala said the oft-cited global economic headwinds facing Canadian businesses are only part of the story. Our “poor productivity performance,” to use her words, is essential to understanding what ails us.
She’s right, of course. Canadian productivity has been slipping relative to the U.S. number since the early 1980s. A study released last year by Deloitte Canada reported that “Canadian output per worker is only 86% of American output.”
The firm released a new report on the subject earlier this month. Bill Currie, vice chair and Americas managing director, consulting and I talked about The Future of Productivity: Clear Choices for a Competitive Canada on Friday. It corrects a couple of misperceptions about why we lag the U.S. (it has little to do with the size, location or even the types of businesses that make up our economy), and it makes recommendations for business leaders, government policy makers and academia.
Here’s an excerpt of my interview with Currie:
Your study found that a company’s ability to grow matters a great deal. Can you explain?
In Canada, we create a lot of companies that are high-growth startups. We’re actually on par with Israel, which was a surprise to us. But those companies, once they’re five years old, are not able to sustain their growth. And that is a real issue for us because high-growth companies create many jobs. The fastest growing 5% of Canadian companies create 43% of new jobs. Growth matters. It drives employment, innovation, cross-border behaviour and sustained value to the Canadian economy. Competitive intensity matters too. Companies that export have higher growth, higher productivity, higher profitability and are more innovative than those companies that don’t export. The reason is that those companies are exposed to competitive intensity by going to the U.S. or elsewhere. We have world-beating companies that do all these things. We just don’t have enough of them.
Are Canadians truly more risk averse than Americans, and is that a drag on productivity?
We talked to 452 U.S. business leaders and 450 Canadian business leaders. We asked them: Are you risk averse or are you a risk taker? In Canada and the U.S., about half the business leaders said they are risk takers; half said they are risk avoiders. A Canadian risk taker and a U.S. risk taker behave exactly the same. A U.S. risk taker and a U.S. risk avoider, they behave exactly the same. While they declare themselves to be risk avoiders, when you actually look at their behaviours, they’re exactly the same as those people in the U.S. that declare themselves to be risk takers. A Canadian risk avoider avoids risk. They want government support; they don’t invest as much in research and development. They don’t invest as much in machinery and equipment. They are less likely to be exporters. They are actually more risk averse than others. And that’s a problem.
What does this mean for the Canadian economy?
Our children will not be as affluent as we are. Not only are we behind, but the gap grows every year. We use the U.S. as a benchmark, but we’re behind other countries as well. And as we continue to slide, the long-term implications for Canadians are very significant. Most income growth in the last decade and more has gone to the top 1% or top .1% of Canadians. Part of the reason for that is because our productivity lags. Productivity is not about people working harder. Productivity is about people producing more per hour worked, which is a different thing. Our problem is not Canadian workers. Canadian workers work as hard, they work as many hours, they are as capable as U.S. or other workers. But we need business to invest in their companies in order to allow those workers to produce more. And we need our workers to accept the fact that that’s actually the key to getting better pay. If you want to fix income disparity, improve productivity. If we don’t do anything about productivity, we’ll go from earning three-quarters of what a U.S. family does for the same work today, to earning half or some other smaller number. The standard of living our children experience will not be what we enjoy.
Is it true that our low GDP growth rates can be attributed to this problem?
That’s factually accurate. We hid behind a 65¢dollar for a long time. We didn’t invest in things that allowed us to be competitive. We’re in a globally competitive world. So borders are increasingly less relevant. Now we’ve gone through a downturn, our dollar is stronger and our businesses can’t actually compete on an equal footing because they haven’t invested in themselves.
Does this mean investors should stay away from Canadian companies?
There are great Canadian companies. There are phenomenal success stories. I talk to tons and tons of business leaders and I’m often surprised by the quality of Canadian entrepreneurs and the quality of Canadian businesses. It’s just that we need more of it.
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