THE BOTTOM LINE: Are productivity plans petering out?

Canada is finally starting to generate some good productivity results. The question now is whether this is a flash in the pan or the beginning of a new trend.

First, the new productivity numbers. Productivity for the entire economy rose 1.1% in 2005, a sharp contrast from -0.3% in 2004 and 0.0% in 2003. Manufacturing has been leading with productivity up by 4.3% in the past year, the sixth consecutive quarter of 4%+ growth for that sector. Elements of the service sector are joining in as well productivity is rising strongly in wholesale trade (6.8%) and in transportation (4.4%).

These figures are quite encouraging, to be sure. Indeed, the fourth quarter of 2005 was the first three-month period in five years in which Canada’s productivity rose faster than the U.S. But the question is whether this will become a trend, or simply fall back into lacklustre growth.

To assess this, we look to the investment data. First, 2005 saw aggressive investment by Canadian companies. After adjusting for price effects, purchases of new machinery and equipment grew by 10.7% in the year, led by computers and other office equipment (24.9%). Industrial machinery spending was up 11.7%, spending on trucks rose 13.2%, and purchases of other transportation equipment rose 19.1%. Falling equipment prices and the strong dollar are translating into strong capital acquisition figures.

In addition to the actual investment data for 2005, we have the recently-published investment intentions survey produced by Statistics Canada. These data are not necessarily indicative of what will happen in 2006 companies can change their minds as the economy evolves. Nevertheless, they can at least tell us what companies are hoping to do. The survey shows that companies intend to boost investment spending by 4.5% in 2006, a solid but more modest increase against last year’s stellar gains. However, the bad news is that the manufacturing sector is not planning to increase investment spending at all.

Some have interpreted this to mean that the hoped-for productivity boom will prove temporary. But bear in mind two things. First, manufacturing investment spending rose a lot in 2005, and simply repeating that level of spending in 2006 (which is what zero growth means) would be a significant accomplishment. Also, companies that invested a lot in 2005 may need to work through 2006 to assess whether even more expansion or modernisation is actually warranted.

Moreover, the weakness in investment intentions is concentrated in two manufacturing sub-sectors wood products and petroleum which both saw huge rises last year. Intentions for other manufacturers are up 5%, which looks very promising.

The bottom line? Conditions remain positive for increased productivity-enhancing investment by Canadian companies, and spending intentions are pretty strong. This suggests that productivity growth will not peter out, but can remain on a faster growth track through 2006, at least.

Stephen S. Poloz, is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade-related issues appears weekly on www.ctl.ca