Canada’s economy has weathered the global economic crisis well thanks to timely fiscal stimulus, low interest rates, a solid banking sector, and revenues from natural resources, according to the study by the Organization for Economic Co-operation and Development, released Wednesday.
But our workforce will have to become more productive to sustain our high standard of living as the workforce shrinks.
Productivity has long been Canada’s Achilles heel, said Derek Burleton, deputy chief economist at TD Economics.
“Nobody has a really confident answer as to why Canada has struggled so badly with respect to productivity. It’s a conundrum,” he said. “Some of it is chalked up to culture, not a lot of risk taking. We don’t tend to invest as much in machinery and equipment.”
The rising Canadian dollar has allowed companies to invest more in those areas.
But at the same time, the strong loonie, along with higher energy prices that increase the cost of materials and transport, and a weaker U.S. economy, have been devastating to the manufacturing sector, which tends to be among the most productive.
As a result, manufacturing has shrunk, said Michael Gregory, senior economist at BMO Capital Markets. “By shrinking a part of the economy that tends to be more productive, you end up with a less productive economy overall.”
On the other side of the spectrum, construction tends to have a lower rate of productivity, partly because very little of it can be mechanized.
Natural resources also tend to be on the low side. “It’s not that the oil patch isn’t innovative. But the productivity in that sector is really constrained by the fact that companies have to dig deeper and look farther out for new oil because you have depleting reserves,” Burleton said.
Both sectors have been huge job creators through the recession.
Multi-factor productivity, or the amount of labour, capital, and natural resources needed to produce a unit of GDP, has remained largely the same in Canada since the 1990s, the OECD said.
“Canada’s overall productivity has actually fallen since 2002, while it has grown by about 30 per cent over the last 20 years in the U.S.” the study said.
By other measures, Canada’s productivity is increasing by a rate of about one per cent a year.
At the start of the recovery, U.S. productivity grew at 6 per cent a year, the strongest pace in more than 50 years, Gregory pointed out.
But – in the painful preceding years, the U.S. economy shed millions of jobs.
“What looked like a boon to productivity also hides the fact that what was created was a massive amount of permanent unemployment and the U.S. is still living with the legacy of that today.”
Still, productivity is vitally important to Canada, economists say.
“A lot of people think productivity is code word for job cuts, for having workers work more for less. That’s one dimension of the argument,” Gregory said.
“We are going to have to become more productive because we’re going to have fewer people working in our society and we have to produce more or there’s less for everybody. It’s about survival in terms of our standard of our living.”
The OECD recommends the Canadian government provide more focused support for business investment in research and development, by replacing generous tax credits with direct grants.
Other hurdles to Canadian economic growth are rising real estate prices and sky-high household debt levels, the OECD cites.
However, a new real estate report says Canadian housing market conditions have cooled slightly.
The latest Scotiabank Global Real Estate Trends report, released Wednesday, found that the inflation-adjusted national average home price fell by 1.6 per cent in the first three months of 2012 compared to the same period of 2011.
The OECD forecasts that Canada’s economy will grow by about 2.25 per cent in 2012 and 2.5 per cent in 2013.
The optimistic prediction comes amid signs that consumers south of the border are taking a breather.
U.S. retail sales declined 0.2 per cent in May, and the 0.1 per cent increase registered in April was revised to a 0.2 per cent drop.
The slowdown, which follows a solid first quarter, was expected, Alistair Bentley, economist at TD Economics wrote in a research note.
“Decelerating job growth combined with ratcheting up of the European crisis has dampened consumer sentiment.”
However, there is a silver lining: part of May’s sales slowdown can be attributed to declining gasoline prices. “This is clearly a positive since it leaves households with more money to save or spend,” Bentley wrote.
Original Article
Source: the star
Author: Madhavi Acharya-Tom Yew
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