Bank of Canada sounds alarm on low productivity, cites inflation risks

4:53 pm Tuesday, March 26th, 2024

By Promit Mukherjee and David Ljunggren

OTTAWA, March 26 (Reuters) – The Bank of Canada (BoC) on Tuesday said businesses urgently needed to boost investment to increase productivity, saying this would help insulate the economy against the threat of inflation.

“I’m saying that it’s an emergency – it’s time to break the glass,” Senior Deputy Governor Carolyn Rogers told a business audience in the Atlantic province of Nova Scotia.

“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.”

The Bank of Canada has raised rates to a 22-year high and says it is still too early to discuss when they might start coming down. Rogers did not mention a potential time line for rate cuts.

Policymakers and businesses have for years fretted over poor productivity in Canada which Rogers blamed on low levels of investment, a lack of competition and the inability of new Canadians to use their skills properly.

“What really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property,” she said.

Inflation could be more of a threat than it has been over the past few decades, as the benefits of globalization decrease and prices come under pressure from demographics, climate change and global trade tensions, she said.

“An economy with low productivity can grow only so quickly before inflation sets in,” she said.

The central bank had thought productivity would improve in the wake of the pandemic but so far this has not happened, she said. At the same time, companies in rival nations are investing more than Canada.

This, she said makes it “increasingly urgent that we turn the situation around”.

The labor productivity of Canadian businesses rose 0.4% in the fourth quarter after falling for six straight quarters. Annual productivity declined 1.8% in 2023, its third consecutive year of decline, according to Statistics Canada data.

((Reuters Ottawa bureau, david.ljunggren@tr.com))

Keywords: CANADA CENBANK/