Low productivity growth ‘Achilles heel’: Macklem Bank of Canada governor mum on key rate cuts, seeks action on output By: Gabrielle Piché Posted: 6:04 PM CDT Monday, Jun. 24, 2024

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A productivity lag is Canada’s “Achilles heel,” the Bank of Canada’s governor told a Winnipeg business crowd Monday.

“We have been very good at growing our economy by adding workers,” Tiff Macklem said. “We have been much less successful at increasing output per worker.”

He addressed roughly 450 businesspeople at a Winnipeg Chamber of Commerce luncheon at the RBC Convention Centre. Beyond, observers watched online via a broadcast.

Macklem spoke publicly for the first time since the Bank of Canada cut the country’s key interest rate by a quarter of a percentage point, to 4.75 per cent, June 5.

Inflation is cooling, observers had said, allowing for a drop in the rate — the BoC’s first cut in more than four years following a series of hikes in 2022-23.

As inflation slows, productivity is vital, Macklem underscored Monday.

“If you want more non-inflationary growth, we’re going to need a concerted discussion (about productivity) between businesses, governments and academics, civil society,” Macklem told reporters after his speech.

“If you want more non-inflationary growth, we’re going to need a concerted discussion (about productivity) between businesses, governments and academics, civil society.”–Tiff Macklem

The country’s real GDP growth is no longer keeping pace with the United States, he outlined, echoing senior deputy governor Carolyn Rogers, who warned in March that productivity growth had reached emergency levels.

Loren Remillard, president of the Winnipeg chamber, questioned Macklem during the luncheon about whether the central bank could be more aggressive in reducing its key policy rate.

Businesses didn’t have the bandwidth to assume more debt during the COVID-19 pandemic, meaning they weren’t investing in new innovations, Remillard commented after the event.

“The cost of that debt is just astronomical compared to where it was pre-pandemic,” Remillard continued, adding productivity is an issue he hears about “on the daily.”

Improving productivity is important to sustaining growth, especially with an aging population and limitations with immigration. Productivity keeps businesses competitive internationally and pays for higher wages, Macklem asserted.

Government policy, barriers between provinces and a raft of other considerations, including adequate housing and investment in technology, affect productivity, he added.

He relayed Canada appears en route for a so-called soft landing, where unemployment doesn’t jump as inflation declines to the bank’s target.

The labour market has adjusted relatively well to higher interest rates. However, newcomers and young workers are disproportionately affected as companies rein in hiring, Macklem said.

The unemployment rate for newcomers is rising faster than the overall unemployment rate. It suggests Ottawa has “room to slow the growth of non-permanent residents” without causing significant labour shortages, he observed.

Canada’s unemployment rate for youth has also hiked — it’s about two per cent above its pre-pandemic average, Macklem said. There could be more job growth without creating new inflationary pressures, he added.

A tougher job market for newcomers and youth is feeding into the central bank’s monetary policy decisions.

Migrants are typically disadvantaged because they don’t have a comparable social network to people born in Canada, Remillard noted to the Free Press.

Manitoba’s overall unemployment rate was 4.9 per cent in May, falling 0.2 percentage points from the month prior. It was lower than the national average of 6.2 per cent.

On Monday, Macklem stayed quiet on the potential number of rate cuts in the remainder of the year. The next Bank of Canada decision arrives July 24.

The entity is watching data on mortgage renewals. About half of mortgage holders have renewed their contracts since the Bank of Canada began increasing its key interest rate, Macklem said.

The 50 per cent left will have a bigger reset than those already renewed, on average — it’s another thing factoring into the bank’s decisions, Macklem explained.

“We don’t want monetary policy to be more restrictive than it has to be,” he told reporters. “We don’t want interest rates to stay higher than they have to be to get inflation back down.”

“We don’t want interest rates to stay higher than they have to be to get inflation back down.”–Tiff Macklem

Still, the BoC won’t jeopardize its progress on decreasing inflation, he said.

Canada’s inflation rate has stayed below three per cent since January, tumbling from a peak above eight per cent in June 2022. The bank’s goal is two per cent annually.

Manitoba currently holds the lowest inflation numbers due to, in large part, to the governing New Democrats’ temporary pause on the provincial gas tax.

The keystone province’s inflation rate was 0.4 per cent in April; across Canada, inflation rose 2.7 per cent year-over-year.

Supply chain issues contributed to heightened inflation in the recent past. Canada could see more supply shocks going forward than over the last 25 years, Macklem said.

“We do need to think about how we’re going to manage them better,” he said during a news conference.

He’d informed chamber luncheon attendees the central bank is building such supply issues, and their transitory effect on inflation, into its analysis and models.

Macklem praised Canada’s high labour force participation, strong immigration and education system.

gabrielle.piche@winnipegfreepress.com