A pair of reports from Statistics Canada today suggests that Canada’s recovery is progressing, but it is relying heavily on sweat & toil and not brains & innovation. Labour productivity in the business sector fell 0.8% in Q2 (or -3.0% a.r.), worse than consensus (down 0.5%), and more than reversing a downwardly-revised 0.5% advance the prior quarter. Productivity was undercut by the combination of slower GDP growth (2.0% a.r. in Q2) and a surge in hours worked (+5.0% a.r.).
So, after a few heartening quarters, Canada’s dreadful productivity performance of recent years has re-emerged. The Q2 drop left output per hour up just 0.8% y/y, a bit below the 25-year average annual growth rate of 1.1%. Weak productivity begets weak wages, and compensation per hour fell 0.3% in Q2, clipping the annual rise to just 0.9% y/y—the slowest since 1997. This combination kept unit labour costs in check, as they rose just 0.1% from year-ago levels. Meantime, U.S. productivity surged 3.7% y/y in Q2 (almost 3 ppts north of Canada’s pace) and unit labour costs fell 2.8% y/y, as firms there continue to keep a very tight leash on payrolls.
Meantime, the factory sector continues to recover from last year’s devastating hit. Capacity
utilization jumped almost 2 percentage points in Q2 to 76.0% for the industrial sector. That’s up from the extreme low of a year ago of 68.1%, but is still well down from the pre-recession trend of around 83%. In other words, there is still plenty of room to grow before the economy comes close to hitting capacity constraints. (That theme is echoed by the August unemployment rate of 8.1%, still roughly 2 percentage points above the pre-recession level.) Circling back to the productivity figures, note that manufacturing output per hour managed to rise in Q2 (+0.1% q/q and a hefty +7.6% y/y), but service sector and construction productivity fell heavily.
The Bottom Line: So far in this recovery, Canadian business has relied on adding to their workforces to generate growth, rather than achieving productivity gains.
Douglas Porter
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