Canada’s labour productivity declines in second quarter #CanadaFinance

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Labour productivity at Canadian businesses fell by 0.2 per cent during the second quarter of 2024, with 11 of the 16 main industries recording declines, Statistics Canada said on Thursday.

Productivity has now declined for two consecutive quarters, after a 0.3 per cent drop in the first quarter of this year. At an annual rate, productivity fell by 0.7 per cent.

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The results build on a worrying trend of declining labour productivity, an important driver for disposable income and standard of living for Canadians, economists said.

“This is not a problem confined to one region or sector — say manufacturing. It is a whole economy issue,” said Douglas Porter, chief economist at Bank of Montreal, in a note to clients. “And while it may seem like an esoteric topic for many, the reality is that unless it is properly addressed, Canada’s relative standard of living will continue to weaken.”

Hours worked in the business sector increased by 0.6 per cent in the second quarter, driven by an increase in the number of jobs, however the growth of output did not keep pace.

The service-producing sector was the main contributor to the quarterly decrease, with information and cultural industries (-2.1 per cent), real estate services (-1.5 per cent) and professional services (-0.9 per cent) showing declines.

Pedro Antunes, chief economist at the Conference Board of Canada, said it’s important to look at productivity before the pandemic, prior to disruptions that skew the data.

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Antunes says Canada’s productivity overall has declined 0.5 per cent compared to the average in 2019 and Canada has been a laggard for decades.

“It’s not just this decline since 2019,” said Antunes. “It’s the fact that we’ve been lagging in our productivity growth for a long time, even prior to the pandemic.”

This low productivity trend has also grabbed the attention of the Bank of Canada this past spring, when Bank of Canada senior deputy governor Carolyn Rogers delivered a speech in Halifax, highlighting Canada’s productivity problem has reached an emergency level.

“One of the pieces that we can point to that is really clear, is our business investment, our private investment as a total share in GDP,” said Antunes. “We are laggards in the amount or machinery, equipment, structures that we are putting in place relative to labour.”

GDP per-capita, another important measure to look at when discussing the standard of living of Canadians, posted its fifth consecutive quarterly decline during the second quarter of this year.

Porter notes Canada continues to be outpaced by our American counterparts when it comes to productivity and our position among the OECD continues to decline.

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“U.S. productivity has thus outpaced Canada by 10 per cent in the past five years alone,” said Porter. “Looking at GDP per hours worked in U.S. dollar terms, the OECD finds that Canada has now slipped even below Italy and Spain and is losing sight of the U.S. and most Northern European economies.”

According to Antunes, industries that have reported the largest declines compared to 2019 are in transportation and warehousing (-9.4 per cent), construction (-11.5 per cent) and utilities (-13.5 per cent).

Antunes says construction in particular has historically been a low-productivity industry, as innovation in that sector has not changed much.

“Construction is a concern because of course we’re throwing a lot of money at an industry that is essentially supply constrained,” he said. “We’re trying to build more housing in an industry that is very restrained in terms of its ability to hire workers.”

Porter says capital spending on residential housing over the last few years may be pulling much-needed investment away from more productive endeavours.

“While we appreciate the need for a steady supply of new housing, especially at a time of torrid population growth, the ongoing fixation on real estate is simply not healthy for productivity,” he said.

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