Canadian businesses need to boost investment in machinery and technology if the country is going to achieve robust economic growth without putting upward pressure on inflation, Bank of Canada Governor Tiff Macklem said Wednesday.
In a speech hosted by the Canadian Chamber of Commerce, Mr. Macklem said private sector spending on digital technology, machinery and employee education is crucial to boosting work force productivity and fuelling the next phase of growth as the COVID-19 pandemic recedes.
“If we don’t get that productivity growth, if we don’t get that investment, we won’t be able to grow the economy as much and get inflation back to target,” Mr. Macklem told reporters after the speech.
High inflation is being driven, in part, by a mismatch between supply and demand in the economy. As the pandemic recovery continues, increasing output per worker could help ease these inflationary pressures, Mr. Macklem said
“If you give workers better tools, better equipment to work with, workers become more productive. What that means is that the economy can pay higher wages without causing inflation,” he said.
The Bank of Canada’s latest projection shows the annual rate of consumer price index growth staying close to 5 per cent for the first half of 2022, then dropping to around 3 per cent by the end of the year – still well above the central bank’s 2-per-cent target.
Concern about inflation, combined with the bank’s assessment that the economy is operating at full capacity, has led it to signal that it will begin raising interest rates soon. Most analysts expect the first rate hike to come at the bank’s March 2 policy meeting.
Monetary policy focuses on the demand side of the economy, using interest rates to increase or reduce demand for credit. Mr. Macklem said there needs to be a focus on boosting supply while higher rates dampen demand. With labour shortages getting more severe, boosting supply means enhancing the productivity of existing workers. And greater investment is the key to that.
Canada has long been a laggard when it comes to business investment and productivity, particularly compared to the United States. Business investment per worker in the U.S. is nearly double that in Canada.
“In addition, research shows that capital in the United States has moved to higher-productivity sectors in larger amounts than it has in Canada. In other words, U.S. capital has been more nimble,” Mr. Macklem said.
Despite the trend, Mr. Macklem said he was optimistic about the outlook for Canadian productivity growth and business investment. Output per worker should improve as pandemic-related health restrictions ease and companies are able to return to more efficient operations.
Moreover, the investment landscape is looking good. Company balance sheets are strong and there is growing demand for Canadian goods, both at home and in the United States.
A recent Bank of Canada survey found business investment intentions are the highest they’ve been since the survey began in 1999. Mr. Macklem urged companies to follow through on these plans, “or risk losing out to U.S. competitors.”
He said companies should build on trends seen during the pandemic, including investment in digital technology and facilitating remote work for employees.
“Businesses must also be willing to pay up for talent, and that comes back to productivity – higher productivity pays for higher wages,” he said.
Perrin Beatty, president and chief executive of the Canadian Chamber of Commerce, questioned Mr. Macklem’s optimistic outlook.
“Our relative performance among advanced economies has been disappointing on metrics like labour productivity, business investment … research and development is another area. … What gives you the confidence we can do much better?” Mr. Beatty asked Mr. Macklem in a question and answer session after the speech.
The governor responded by highlighting areas in which he saw Canada having competitive advantages, including in natural resources (he cited structural wood products and plant-based proteins), science and technology research, and in the country’s robust trade agreements.
“We beat ourselves up sometimes in Canada. You know, ‘We don’t take as much risk, we’re not as nimble, we’re more cautious.’ Well Canadian businesses have demonstrated through the pandemic they can be very nimble, they can be very adaptable, they can pivot quickly, they can invest,” Mr. Macklem said.
He said he expects investment by Canadian energy companies to pick up given the current high prices for oil. But energy investment is unlikely to drive overall business investment in Canada like it has in the past.
“That really reflects the global transition to cleaner sources of fuel. And so the investment response we are expecting is more muted in oil and gas than what we’ve seen in the past for the kind of prices we’re seeing today,” he said.
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