WE’D BE BETTER OFF WITH BETTER PRODUCTIVITY: WILKINS
Boc’s No. 2 official drives home message about lost wealth, Kevin Carmichael writes.
I wasn’t planning to write a twopart series on productivity this week, but then again, I wasn’t counting on so much high-profile help in making the case that it’s way past time for Canada to start taking the subject seriously.
Last week, Mark Little, chief executive of Suncor Energy Inc., one of the country’s biggest companies, made the rarely heard point that however cumbersome regulation has become, there isn’t actually a law that forbids companies from buying cutting-edge technology. “This is on us as leaders,” he said at an event in Toronto.
On Wednesday, it was Carolyn Wilkins’s turn to prod. Again, Toronto was the setting. The No. 2 official at the Bank of Canada told her audience that if Canadian productivity had grown as fast as that of the United States during the 1990s, gross domestic product would be about 13-per-cent higher today, or $2.4 billion instead of $2.1 billion.
Put another way, the lost wealth amounts to an additional $5,000 per Canadian each year for the past 25 years. For you politicians out there, that’s the return on keeping your regulatory thicket trimmed, your tax rates competitive and your subsidies targeted.
For executives, that’s the money you leave on the table by putting the next quarter ahead of the next decade.
“We all know that we could be more productive,” Wilkins said in a speech at the Economic Club of Canada. “Canada trails many other advanced economies on indicators that we know increase productivity and the competitiveness of our businesses.”
Public appearances by members of the Bank of Canada’s policy committee are headline events again because interest-rate cuts are back on the table after the central bank in January cut its forecast for economic growth.
Wilkins offered no clues on where borrowing costs are headed in the months ahead. Those came from the Statistics Canada, which published new trade data that reinforced the central bank’s downbeat outlook for 2020, while backing Wilkins’s argument that Canada could be setting itself up for a lacklustre future.
Non-energy exports of merchandise goods increased 0.4 per cent in December from the previous month, Statistics Canada reported. That’s an improvement on recent results, but still poor by historical standards, reflecting the toll the trade wars have taken on global demand. The average monthly increase dating back to 1988 is 0.4 per cent.
More significant was evidence that the Bank of Canada was correct in January when it said the big increase in business investment during the third quarter was likely an aberration. Imports of machinery and equipment, a proxy for business investment, dropped four per cent in December, the fourth consecutive monthly decline. The average since 1988 is a
0.4-per-cent increase.
“Underlying trends still look lacklustre,” said Nathan Janzen, an economist at Royal Bank of Canada, where the economics team sees at least one interest-rate cut of a quarter point by the spring.
While Janzen was talking short term, Wilkins was looking just over the horizon.
Her speech revolved around the “neutral” interest rate, or “r-star” in economics shorthand, the theoretical setting at which monetary policy is neither encouraging nor discouraging economic growth.
That rate has come down a lot because of structural changes that make it harder to grow fast without stoking rapid inflation.
The growing number of older people is probably the most important shift, because the population of people in their prime working years is shrinking. That’s why immigration is so important. The surge in new Canadians in recent years won’t offset the economic impact of mass retirement, but it will cushion the blow.
The neutral rate is also determined by productivity, which has been weak for years. If we don’t find ways to generate more wealth per person, the central bank will have little choice but to leave interest rates permanently low.
That might sound like fun, but consider what we’ve been through in the past decade or so. The benchmark rate was 4.5 per cent at the end of 2007, compared with 1.75 per cent today. The central bank’s very rough estimate of neutral is around three per cent. A feature of the new economy will be a perpetual incentive to borrow, meaning the current threat posed by excessive levels of private debt could become a permanent one. Put another way, the Bank of Canada will have less firepower to fight the next recession.
“We know that a low r-star world poses twin challenges,” Wilkins said. “It means that central banks need lower interest rates, possibly for longer, to counter harmful economic shocks and achieve their inflation objectives. It also means that financial vulnerabilities can build, posing risks to future growth.”
Wilkins, a leading candidate to replace Bank of Canada governor Stephen Poloz when he retires later this year, nudged politicians and executives to do more.
She said it’s not her place to be “prescriptive,” but she offered some suggestions anyway.
Interprovincial free trade, pushing harder into a greater number of export markets, big infrastructure projects such as port expansions, and more spending on technology and research would all boost productivity, she said.
None of these ideas are new, but that only reinforces her point: We’ve been so busy talking about structural change that we have failed to realize the shift has already begun.
“Monetary policy can only take us so far,” Wilkins said. “It won’t raise trend growth in incomes, and it won’t raise r-star either. Canada and other advanced economies will need to do more to support prosperity and avoid suffering from chronically slow growth and weak demand in the future.”
Financial Post