Canada must tackle weak productivity to inoculate the economy against factors that will drive future inflation, such as the pullback from globalization, said Carolyn Rogers, senior deputy governor of the Bank of Canada.

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“An economy with low productivity can grow only so quickly before inflation sets in. But an economy with strong productivity can have faster growth, more jobs and higher wages with less risk of inflation,” she said in a March 26 speech in Halifax, adding that other drivers of inflation will include changing demographics, the economic impact of climate change and global tensions.

Canada’s productivity has fallen from a “not great” record of producing 88 per cent of the value generated by the United States economy per hour in 1984 to just 71 per cent in 2022, she said. And while weak investment has been a problem in Canada for the past 50 years, the gap between the level of capital spending per worker by Canadian firms and the level spent by their U.S. counterparts has become worse over the past decade or so.

“While U.S. spending continues to increase, Canadian investment levels are lower than they were a decade ago,” Rogers told her audience, adding that Canada has also fallen behind most of its G7 peers, with only Italy seeing a larger decline in productivity relative to the United States.

“You’ve seen those signs that say: In emergency, break glass — Well, it’s time to break the glass,” she said.

Increasing competition is among the solutions that Rogers proposed. She also urged policymakers to focus on sectors and companies that add greater value to the economy and to set the stage for increased investment, including in technologies that will improve productivity and efficiency.

“When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers without having to raise prices,” Rogers said. “The bottom line is that the benefits from raising productivity are there no matter what your role is: for workers, for businesses and, yes, for central bankers, too.”

Rogers said policymakers should also focus on labour composition, or the skills workers bring to the job to improve Canada’s productivity.

This includes training and “re-skilling“ for existing workers and taking advantage of immigration.

“Too often, new Canadians are working in jobs that don’t take advantage of the skills they already possess. And too often these people wind up stuck in low-wage, low-productivity jobs,” she said. “Doing better at matching jobs and workers is crucial to the future of Canada’s economy.”

Rogers said her biggest concern, though, is competition, especially because certain sectors in Canada are not facing competition from firms in other provinces, foreign rivals or new entrants.

“Of course, every country has certain sectors that it champions, and there can be valid reasons to protect local businesses,” she said. “However, too much protection can lead to problems. It can also help to explain Canada’s weak record in business investment.”

Rogers urged policymakers to create more regulatory certainty and speed up processes so businesses can have the confidence to make the investments required to improve productivity.

The Bank of Canada, for its part, will remain focused on providing price and economic stability, which she said is most conducive to risk taking and the kind of investment that will improve productivity.

“Increasing productivity is a way to protect our economy from future bouts of inflation without having to rely so much on the cure of higher interest rates,” Rogers said.

• Email: bshecter@postmedia.com

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