Canada's lacklustre competitiveness is catching up with us in a big way, suggests Bank of Canada governor Mark Carney.
He has an excellent point, although some private-sector forecasters believe his pessimism could be overdone.
After holding Canada's key short-term interest rate steady at just 1% this week, Carney yesterday provided some detail about the rather gloomy world view that led him to do so.
The central bank's Monetary Policy Report makes it clear that rates are on hold largely because Carney is very concerned that Canada's export industries will struggle this year.
That's mostly because of this country's high dollar, but also largely because of Canadian firms' failure to keep up with U.S. gains in productivity.
A measure of this pessimism on exports is that the central bank expects to see little boost for Canada from a powerful U.S. stimulus package announced last month.
Although there's been a big jump in the bank's estimate of U.S. growth for 2011, to 3.3% from 2.3% three months ago, the forecast for Canadian growth has barely edged up. It's now 2.4%, up from an earlier 2.3%.
You'd have a difficult time finding a private-sector economist who would disagree with Carney's concerns about competitiveness. As well, the bank's mediocre growth number isn't much lower than those of many other forecasters.
Nevertheless, some prominent economists still expect Canada's exports and economic growth to chug along at a respectable rate in spite of these disadvantages.
At the optimistic end of the scale, the Royal Bank predicts healthy Canadian growth of 3.2% this year.
That's largely because it foresees a stronger pickup in exports than the central bank, said assistant chief economist Dawn Desjardins.
Productivity growth -- which measures the improvement in how much a Canadian can produce in an hour at work -- has been "quite poor" in recent years, Desjardins agrees. Nevertheless, she said, "things are probably not as bad as the Bank of Canada is expecting."
One reason for the central bank's very gloomy outlook is perhaps that it's looking at an exceptionally bad period for Canadian productivity performance.
With companies now stepping up investment in new machinery and equipment, it's likely that productivity growth will look better this time next year, she suggested.
Over at BMO Capital Markets, deputy chief economist Douglas Porter also maintains a little more optimism than Carney, with a growth forecast of 2.7%, even though he lauds the central bank for hammering home the message that Canadian business must work harder to stay competitive.
"They've done a real service in pointing out these trends," Porter said yesterday.
While the bank calculates that a rising dollar has caused about two thirds of the competitiveness erosion suffered by Canada in the past five years, poor productivity performance accounts for the other third, and that's the part we can actually fix, Porter noted.
He's hopeful, though, that renewed business investment this year will help reverse this under-performance.
Nevertheless, Porter is less worried than Carney about the immediate future for Canadian exports.
While currency and productivity trends are important influences, he reasons, they're probably not as important as the strength of U.S. demand.
This seems to be picking up nicely.
As growing U.S. demand combines with the buoyant effect of stronger global growth on resource prices, Canadian export earnings are already showing some improvement.
And as the economy's momentum builds, "surprises about Canada's growth will probably be to the upside," Desjardins predicted.
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