March 29, 2005

Guest Column

By Stephen Poloz

Sr. Vice-President & Chief Economist


Look beneath the surface

The latest news on Canada’s productivity was grim — evidently, productivity barely rose in 2004, even while the U.S. continued its productivity miracle.

This in a year when Canadian companies were expected to be scrambling to raise productivity to adjust to the strong dollar.

What gives?

In fact, our productivity is not as bad as the headlines suggest.

True, labour productivity for the entire economy rose by only 0.6 per cent between the end of 2003 and the end of 2004. But the manufacturing sector, where we expect to see the most adjustment to the strong Canadian dollar, saw productivity increase by 4.6 per cent over the same period.

This, of course, means that productivity declined in some other sectors — this can happen when employment rises and for some reason output falters.

For example, the construction sector saw productivity decline by 5.9 per cent during 2004.

So, manufacturers appear to be doing the job, but how are they doing it?

One way is by simply increasing output with the same workforce.

When the economy slows, some companies keep their workers on staff but shorten their hours or just let them work at a relaxed pace. Then, when demand picks up, the plant can simply meet the new orders without adding more workers.

Sure enough, capacity utilization in manufacturing has risen from 81.7 per cent in mid-2003 to 88.5 per cent at the end of 2004.

What happened was that the rise in the Canadian dollar from 62 cents to 75 cents during 2003 heralded a return to strong global economic growth and increased demand for Canadian exports — a return to normal conditions. As manufacturers filled those new orders in 2004, they used their factories and workforces more efficiently, boosting productivity significantly.

The rise in the dollar from 62 cents to 75-76 cents may have represented a return to normal global business conditions, but the further rise into the low 80s was something else again, putting considerable stress on some manufacturers.

With capacity utilization already approaching 90 per cent, there is very little additional productivity lying around on the shop floor. So what happens next?

The answer is increased investment in machinery and equipment. And according to Statistics Canada, manufacturers intend to spend a record $20 billion on new equipment in 2005.

There was already a rise of 9.4 per cent in equipment spending volumes economy-wide in 2004, and trend growth in import volumes of machinery has picked up to around 15 per cent. Manufacturers are taking advantage of the strong Canadian dollar to pick up some new equipment at fire-sale prices.

And where is the money for these investments coming from?

Despite all the stress due to the rising dollar, manufacturing profits rose by 34 per cent in 2004, after a seven-per-cent decline in 2003.

This performance is not shared by all sub-sectors, of course. In some cases, the effects of the higher dollar have been more acute, such as in metal fabrication, textiles, leather, clothing and furniture. But other sectors have managed to restore profitability by boosting their capacity utilization.

The bottom line?

Look beneath the surface of Canada’s poor productivity record and you find an economy that is responding well to the new reality. Expect productivity to rise even more in 2005.

Stephen S. Poloz, is senior vice-president and chief economist at Export Development Canada. The views expressed in this column are those of the author and not necessarily of Export Development Canada.

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