Increased productivity is a rising tide that lifts all boats, and the lack of it stifles growth. By keeping inflation low while improving efficiency, it is a kind of virtuous cycle that benefits consumers and businesses alike.
On a per-capita basis, Canada’s GDP has barely budged, with growth driven by population increases rather than by productivity.
Yet Canada’s productivity has stagnated, and, not surprisingly, so has its economy. For the past seven years, Canada’s productivity has barely budged, even as it has accelerated in the United States. And the gap with the U.S. has been widening. Since 1980, Canada’s productivity has grown by 68 per cent while the U.S. has had an 87 per cent increase.
On a global stage, Canada is falling behind peers. Capital expenditures, which are building blocks of productivity growth, has flatlined in Canada over the past decade while they have surged in the U.S.
The result for Canada is anemic growth. On a per-capita basis, Canada’s GDP has barely returned to pre-pandemic levels, with most growth driven by population increases rather than by genuine improvements in productivity.
Without improvements in productivity, Canada’s long-term growth picture is threatened.
The cost, though, extends far beyond gross domestic product; stagnating productivity also hits consumers in their pocketbooks. Over time, Canadian consumers will pay more than those in other countries while receiving subpar goods and services, whether in groceries, airfares or cellphone plans.
There can be a host of reasons behind Canada’s sluggish productivity growth, one of which is lackluster investment in capital and labour. Low investments could be traced back to limited competition, which discourages investment and innovation among businesses.
But there is the prospect of a turnaround. By leveraging artificial intelligence, Canada can play catchup and boost its productivity.
The productivity challenge
Productivity, measured by output per hour of work, has been stagnating in many developed economies since the 2000s. In this sense, Canada is hardly the exception. But a comparison with other developed economies illustrates the extent of Canada’s productivity challenge.
In the post-pandemic era, while the U.S. has experienced a productivity renaissance, Canada has struggled to regain its footing despite a steady influx of educated immigrant workers.
The surge in U.S. productivity has played a role in its resilient growth even in a restrictive rate environment, while the Canadian economy has lost steam.
Over the past two decades, Canada has had one of the lowest productivity growth rates among the developed economies in the G7, with output per hour worked going up by under 20%, while the number in the U.S. has been 33%. This places Canada above only Italy and Japan. If the trend persists, Canada could tumble to the bottom of G7 in productivity growth.
In the new era of higher interest rates, rising labour costs and overall higher costs of doing business, businesses must continuously improve productivity and efficiency to stay relevant.
Lack of competition
Investments among Canadian businesses in both capital and labour have been modest, at a time when technology is moving faster than ever, and investment in workers can elevate labour productivity.
Among the G7, Canada and France are the only countries where research and development spending as a portion of GDP has not increased over the past two decades.
It’s no mystery, then, that low investments have translated into mediocre productivity growth.
A lack of competition could be contributing to these low investments. A substantial portion of the Canadian economy is shielded from foreign competition, including sectors like financial services, telecommunications, airlines, retail and groceries.
Take groceries. It’s a market ripe for competition, yet in Canada it is dominated by only three players. The lack of competition is one reason that Canada’s overall inflation rate has been slow to return to pre-pandemic levels, as food prices have increased above the overall inflation number. Canada’s groceries business is a sclerotic market, where innovation and investments have lagged as consumers have become increasingly frustrated.
Read more of RSM Canada’s insights into the economy and the middle market.
But it doesn’t have to be this way—for consumers and for businesses—and productivity offers a way out. To begin with, rising productivity would raise profits among grocery retailers; without such improvements companies might simply raise prices without improving their products and services. This is a lose-lose scenario.
Then there is issue of foreign competition, or lack of it. While protectionist policies can foster domestic industries, these policies also come with long-term costs, such as impeding productivity growth by insulating businesses from global competitive pressures.
An opportunity to narrow the gap
But there are ways for businesses in Canada to narrow the productivity gap.
To remain competitive globally, Canadian businesses need to invest more in machinery, equipment and talent, as well as embrace technology and innovation.
Technology, specifically artificial intelligence, provides a rare opportunity to close this gap. AI can automate routine tasks, freeing up human resources for more complex, value-added activities. It can also provide deep insights from large data sets quickly and accurately, optimizing processes in finance, health care, manufacturing and more.
Increasing investments can enhance productivity in multiple ways:
- Capital investments: This involves building new factories, investing in efficient machinery, or equipping workers with advanced technology and software that enable them to do their jobs more effectively.
- Labour investments: Given that the Canadian workforce is highly educated, the focus should be on matching workers with suitable jobs that align with their skills, alongside investing in their reskilling and upskilling.
- Multifactor productivity: This measures how effectively capital and labor are used. Canada has a high proportion of small and medium-sized businesses that might not be able to take advantage of the economies of scale the way large firms can. Canada’s sparse population and vast territory make the transfer of ideas and goods more difficult. But machine learning and AI can help improve multifactor productivity and bridge this gap.
The right incentives
None of these investments, though, will be made without the right incentives. The easing of monetary policy, most likely later this year, will make the investment environment more favorable.
On the government front, policies that encourage competition and reduce protectionism are desperately needed. The recent changes in the Competition Act are long overdue, but likely still not enough.
Instead of the government stepping in to intervene often, such as in the case of telecommunications and groceries, if the regulatory landscape were set up to allow more competition, government intervention would not be needed as much.
The federal government’s $2.4 billion investment is laudable. But for AI to breathe new life in Canada’s productivity, more competition is needed to push businesses to invest in technology, capital and labour, ultimately leading to an increase in productivity.
The takeaway
Canada’s productivity has fallen behind. But the past does not have to dictate the future.
Increasing investments in innovation and technology, as well as in the workforce, to harness the power of technology can be a promising solution to this enduring challenge.
Easing regulations to increase competition can further motivate business investments, which will not only narrow the productivity gap with other nations but also ensure sustainable growth and a higher quality of life for Canadians.
