By R. Bruce Striegler

The Conference Board of Canada’s Deputy Chief Economist Pedro Antunes, about to begin a web presentation on Canada’s competitiveness and productivity problems says, “We can think of the national economy in a similar way we think of the operation of a small business, and we can think of productivity as the supply-side of the business.

Productivity is what results when we mix the factors of production, namely the amount and type of capital available, the amount and quality of labour and the efficiency with which capital and labour mix to produce products or services. In its simplest terms, productivity is the cost of labour per unit of output. In the words of a former healthcare executive from Ontario, “productivity is about getting smarter, faster, cheaper and better at producing products and services.” Over the past 30 years, productivity growth in Canada has lagged behind that of the United States and other leading economies, which is distressing because long periods of low productivity growth relative to our competitors typically results in lower international competitiveness, which tends to foreshadow a faltering wealth creation process.

While previous federal governments have taken steps such as negotiating trade agreements to enhance competitiveness, passing tax legislation favourable towards capital investment, and welcomed foreign investment, financial institutions such as TD Financial point out that there remain problems which discourage small firms from growing larger. TD also points out that there are some key industries in Canada which remain shielded from competition, lessening their desire to increase productivity and to innovate. Organizations such as the Chartered Professional Accountants of Canada note that while government has taken some steps to improve productivity, greater incentives should be provided to firms grow into larger, more efficient enterprises, which would not only allow them to compete more effectively domestically, but would also allow them to meet foreign competition in overseas markets.

Although economists say that the cause of the productivity gap is difficult to pinpoint, research suggests Canadian business is handicapped by lower investments of capital compared to other countries, that there is less of a focus on research and development, that very few global companies are based in Canada, and that there is a perception that Canadian managements are risk adverse, a perception borne out perhaps by the statistic that only 3.6 per cent of Canadian companies export. Worse, Canadian export activity is slowing. Global exports increased at an average annual rate of 9.1 per cent between 2000 and 2012. But, over that same period, Canadian export growth only averaged 4.2 per cent annually. More alarming is the fact that Canadian export intensity (exports measured as a per centage of GDP) dropped from 46 per cent in 2000 to 30 per cent in 2012.

Over the past three decades, growth in Canadian labour productivity has trailed other major economies. In 2012, Canada’s level of labour productivity ranked 13th among 16 peer countries. Only Finland, Switzerland and Japan are exhibiting lower levels of productivity [see sidebar]. With productivity gains lower than those of their competitors, all other things remaining the same, companies will find themselves less and less able to compete. For a country that fails to keep up, corporate profits are squeezed, government revenues fall, and economic growth and job creation becomes threatened. Ultimately, living standards will fall.

Aging workforce will continue to hamper Canadian growth

Pedro Antunes opines that “When we look at the long-term, essentially looking at the economic potential or the ability to produce, we’re seeing a really constrained outlook for growth over the next few years. As we look even longer, we’re seeing a very restrained and very different picture for economic growth in Canada.” Mr. Antunes says availability of appropriately skilled and educated labour is the biggest challenge to the Canadian economy. “It’s a different world going forward, with an economic growth potential of under two per cent over the medium and long term.”

Canada’s projected economic growth for 2015 was under two per cent. In the 1990s and early 2000s, annual GDP growth was between 2.7 and 2.8 per cent. Demographic shifts are part of the reason for this slowing growth. The labour force, which had been growing yearly at 1.8 per cent in the past decades, is now moving towards an annual growth rate of 0.6 per cent. Antunes points out that sustained, increased productivity is key to maintaining economic growth potential. “Greater productivity growth can help to offset the impacts of aging demographics,” he says. One of the consequences of Canada’s lagging productivity compared to the U.S. and others has resulted in a $7,000 per capita annual income gap. For the first time in Canada’s history, there are more people age 65 and over than there are 14 and under. At the same time, Canada’s median age is the oldest it’s ever been, 40.5 years, up from 38.6 in 2005 and 31 in 1985.

Immigration needed to compensate for low national population growth

This would suggest that as population growth slows and the population ages, the country will depend more than ever on immigrants. But between July 1, 2014, and June 30, 2015, Canada received 239,800 immigrants, down from 267,900 in 2013 -14. In addition, the number of non-permanent residents decreased by more than ten thousand for the first time since 1997-98. Statistics Canada reports that although international migration growth slowed, it remained the main lever of population growth, accounting for 60.8 per cent of population growth in 2014-15. In comparison, the country’s natural increase accounted for 39.2 per cent. Mr. Antunes says that with population growth in the 65 years old and up category set to exceed the growth rate of those of working age, the labour participation rate of the overall population is set to decline. Population aging is a widespread phenomenon in the industrialized world, and in recent years, the proportion of persons aged 65 years and older has grown in every G7 country. At 15 per cent in the U.S., and 16.1 per cent in Canada, the two countries have the lowest proportions of persons 65 years and older in the G7. As a comparison, the picture in Japan is quite different as the country’s population is among the oldest in the world, with 26 per cent aged 65 and older.

Mr. Antunes points out that labour force growth, which in recent decades has been running at close to 1.8 per cent per year, is essentially moving into the range of about .6 per cent per year. ”What I’m telling organizations in Canada today is that the supply of labour is slowing down, as those exiting the work force are becoming more numerous. He adds that businesses are telling him is they are seeing more people stay in the workforce longer. “That’s been true, but perhaps now we’re beginning to see the situation leveling off. Sooner or later all those who stayed on in the workforce are going to retire.”

Does improved productivity require a new approach?

He says that anywhere between 225 to 275,000 workers are leaving the workforce annually, and Antunes says this is a challenge for Canadian business, “There’s not a lot of labour, and we’re going to have to grow our production in other ways.”

For years, the Conference Board of Canada and others have been warning Canadians about Canada’s poor track record on productivity growth. The Canadian policy approach has been to attract foreign investment, and to encourage Canadian business enterprises to invest in productivity-enhancing investments through low taxes, low inflation, reducing the burden of regulation, liberalizing international trade and expanding the number of countries with which Canada has negotiated free-trade agreements, maintaining a well-educated work force, and providing solid research funding for universities and generous business research tax credits. Enabling productivity is the job of government, but government can do very little to implement productivity growth at the corporate level. This raises a contradiction of sorts, since in the current economic stagnation, businesses have little incentive to spend significant amounts on new plant and equipment that would increase productivity levels.

How Canada compares to other parts of the world

Picking up the discussion, Ataman Ozyildirim, a Conference Board economist and Director of business cycles and growth research, tells us that global GDP growth in 2015 is likely to end up at 2.5 per cent, slightly slower than in 2014. “When we’re looking at the global outlook for 2016 there’s not a big boost coming from anywhere in the world economy, and we’re looking for a moderate increase to 2.8 per cent for world GDP growth.” He says that the U.S. growth stays at trend on the back of solid household consumption, a strong labor market, but weak investment and exports.

The expectation is for modest recovery in European countries, underpinned by quarterly easing, but he says that deflation and emerging markets pose a threat. “At the same time, Japan is struggling to gain momentum where weak corporate investment and political unrest put “Abeonomics”, the economic policies advocated by Prime Minister Shinz Abe, at risk.” Mr. Ozyildirim says that emerging markets are affected by the end of the super commodity and credit cycle, and there will be increasing financial instability in the slowing environment of China and South East Asia. Meanwhile Brazil and Russia are in deep recession. “The positive growth in India and Mexico won’t offset those declines, and there is no strong recovery in sight.”

“This, of course, has to do with the Chinese economy, the world’s largest emerging market, which has come to the limits of its growth model. Until the Chinese economy transforms from its investment-led growth to more domestically-led consumer growth, we see a gradual slowing in the Chinese outlook.” He suggests that the Conference Board, using alternative growth rates for China, is predicting growth rates will level down to about four per cent going forward and for 2016 the Board is looking at about 3.7 per cent growth for China. “This is holding back growth in the world economy.” Looking further out, Ataman Ozyildirim says the story is much the same, “Mature economies are holding on, gradually slowing, largely having to do with changing demographics. Emerging markets are also slowing, but their problems are more about the lack of being able to drive productivity and hold up investment.”

Over the next ten years, he says, the world economy, will continue to struggle to go beyond three per cent annual growth. “The biggest story about the global economic outlook is the demographic issue.” Ozyildirim cites the 2008-2009 global crisis as one reason for slowed demand and investment, but says that technology and innovation have not translated quickly into corporate productivity. “The regulatory environment and weakened competition inhibits productivity growth, and those effects have become bigger in times of slowing growth,” he says. Business can play a role by improving operational efficiency by adopting best practices and by expanding their investment in technology and innovation. He says that the world is slowly drifting into a global productivity crisis, largely unnoticed as economies struggled to rebound following the global financial crisis. Mr. Ozyildirim notes that the rise of efficiency of global production from 2007 to 2014 has now been reduced to a quarter of what it was during the period of 1999 to 2006. With little recovery in sight before 2025, if left unaddressed, slow productivity eventually will limit a company’s ability to grow and compete as profits are squeezed. This will ultimately threaten global economic growth and job creation and derail recent gains in global living standards.”

Mr. Ozyildirim says that while there are many factors related to competitiveness that are beyond a company’s control, productivity is not. “There are a number of ways to approach this, which include managing rising labour costs by increasing the return on human capital.” He suggests investing in building skills of the future, taking note of new technologies on the horizon or going beyond the traditional human resource frameworks to focus on new combinations, including building talent-eco systems, crowd sourcing or involving talent communities. “As well, companies can outsource, redesign or eliminate low-productivity tasks.” He continues, noting that productivity increases can be found by employee engagement as well as having an innovative culture. “Competitiveness can be gained by creating more value-added in the manufacturing value chain. Businesses in a high cost environment compete increasingly on differentiation (quality) than efficiency (cost) and new technologies call for specialization and scale.” Finally he says, “Build on new trade agreements, such as CETA or the developing TransPacific Partnership.”

The Conference Board’s Deputy Chief Economist Pedro Antunes says businesses will have to increase their productivity by increasing their operational efficiency. Business will also have to invest in training their workforce and have strong employee engagement to ensure their productivity is optimal, while Ozyildirim notes, “It’s not that workers have to work harder, they have to work smarter.” Canada also needs a sharper focus on the right mix of government policies and local conditions that can help grow and create corporations that can compete with the best in the world. How effectively we do so will shape our economy and society into the future.