Approaching the end of the Canadian recovery: Time to worry about productivity

After a decent string of strong numbers, the most recent data releases are pretty tepid. It would appear that the days of recovery are coming to an end.

Once again, it's important to make the distinction between the US and Canadian recessions. The US is digging itself out of a balance-sheet recession, and there simply is no quick way out of the mess they're in. Recovery there is going to be a long, slow grind; it's very sad, discouraging story.

Happily, it's not our story. As I noted way back in March 2009 (most recently updated here), Canada's recession was caused by the sudden deterioration in our terms of trade, driven by a collapse in commodity prices. When commodity prices rebounded, so did our terms of trade:

As our terms of trade increased, so did consumers' buying power, and this increase in domestic demand drove a recovery in employment:

(Compare this with Calculated Risk's graph of US employment losses.)

Friday's July LFS release showed a decrease in employment, driven by an important drop in the number of full-time employees. That's clearly not good news, but there are some odd seasonal things going on with education sector employment, and the number of hours worked actually increased. Maybe some of the bad news will wash out in the next couple of months.

So far, things have gone pretty smoothly: once the cause of the recession was removed (i.e. the recovery in commodity prices), the Canadian economy bounced back fairly quickly. But now that the rebound in commodity prices has stalled, the Canadian recovery is also likely to slow down.

This doesn't mean that we're going to fall back into recession, but it does mean that future growth is going to have to be driven by things such as increases in innovation and productivity. We've not been doing very well on that front, and the increase in our terms of trade (which has essentially the same effect as an improvement in productivity) allowed us to enjoy increases in real incomes even while our productivity numbers stagnated.

Of course, commodity prices may resume their upward trajectory, thus buying us some additional time. But we're still going to have to get our productivity act together at some point.

Comments

[Declan]

"The US is digging itself out of a balance-sheet recession, and there simply is no quick way out of the mess they're in. Recovery there is going to be a long, slow grind; it's very sad, discouraging story.

Happily, it's not our story."

Yeah, except how's our balance sheet?

Productivity will take care of itself, I wouldn't worry about it too much.

[BillBell]

Not being an economist, I can delude myself that I can understand how short- and medium-term, modest improvements in productivity might be achieved.

But what could possibly be done quickly to make for improvements in Canada's levels of innovation?

[Determinant]

Given how large the US is as a trading partner, particularly in Ontario's manufacturing sector (everything from cars to electronics to aviation), I question how far our recovery can go without a US recovery. It's like trying to box with one hand tied behind your back.

To put it another way, the US situation puts a permanent shackle on our recovery.

[finance]

BillBell:

You've just asked the $10,000 question. Innovation = productivity. Canada has studied the issue to death, and still doesn't know. Part of Canada's problem is that we have a heavy dominance by foreign corporation -- innovation will tend to occur closer to home first, second Canada is a country of generalists, innovation are harder when companies are less specialized. One problem often cited is that Canada suffers from fewer recessions (than the US) the process of "creative destruction" is less powerful here. Finally, and this is the kicker -- Canadian companies are far less ruthless in firing staff, than American companies.

On the other hand Singapore, has been highly innovative (high productivity) -- so again there appears to be less here that meets the eye.

[Rick]

Our corporate Tax policy is poorly thought out, as is the proportions in which we let banks lend, and our higher education system is falling apart when it comes to research and technology with no change of direction in sight. This is the new status quo: low growth and slowly rising underemployment. Thank goodness our land is valuable.

And for goodness sakes, if you have any understanding of economics or finance you would have to understand that business cycle and supply side economics is circular garbage...... Canada is less productive not because we are too liberal or because we have too many regulations or because we tax corporations or our citizens too much.... it might in fact be the contrary. i.e Singapore is not productive in contrast to Canada and really Singapore is not productive at all. It sickens me to have to read things like this all the time....

[Andrew F]

Apparently our foreign-owned firms are more productive than the domestically controlled ones.

All that said, my anecdotal experience is that there is something of a push right now in terms of IT and infrastructure spending to facilitate future productivity improvements. However, these things take time to bear fruit, so I suspect we might see slightly improved numbers in the next few years. I think part of the reason we haven't been benefiting from the high CAD:USD exchange is the uncertainty that is keeping many firms from investing at the moment. Once the US outlook becomes more certain, maybe we'll see more business investment.