NEWS / Foreign Exchange

Reconciling the Canada-U.S. productivity gap: are all of the economic statistics being correctly measured?

Summary

• Since 2001, worker productivity growth in Canada has been sluggish compared what it has been the United States. Yet GDP has grown at roughly the same pace. It follows that Canada??™s gains were accompanied by a strong surge in employment.

• That said, Canadian inflation has behaved as though the country??™s economy had no price to pay for its anemic worker productivity.

• As a result, whether worker productivity has been properly measured becomes a legitimate question, particularly in light of the fact that the Canadian economy has been restructuring.

• What renders Canada??™s productivity shortfall particularly perplexing is the fact that since 2001, Canadian businesses have invested proportionately more in their capital stock than U.S. businesses have.

• Since it is hard to get a good reading of the situation, economists need to be careful. In these circumstances the margin of error is larger with regards to monetary policy.

Weekly indicators

• United States ??“ Housing starts rebounded by 9% in February following a 14% drop the previous month. Furthermore, new building permits, which are an advanced indicator of housing starts, fell to their lowest level since November 1997. When combined with declining housing completions, these developments should begin to weigh heavily on construction sector employment during coming months. This in turn will pave the way for a rising unemployment rate. As expected, the Federal Reserve maintained its key rate at 5.25%. The Fed also modified verbiage in its communiqu?©, in order to increase its maneuver room regarding the direction of future rate changes.

• Canada ??“ The Consumer Price Index rose by 2% in February on an annualized basis. The CPIX, the index followed by the Bank of Canada, came in at 2.4% in February, up from 2.1% the previous month. February was marked by exceptional events such as inordinately cold weather, a strike at CN and problems in Ontario refineries. However we do not believe that these events pose a threat to our forecast of contained inflation in Canada. Excluding the housing component, which has accounted for a good part of inflationary tensions during the past two years, CPIX inflation is just 1.8%. In fact, total inflation should return to about 1.7% in March. After a strong push in December, retail sales fell by 0.2% in January, their first retreat in three months. One sector in particular is responsible for the drop: automobiles. In volume terms, sales fell by 0.2% in January, their third drop in four months. Despite the January pullback, the volume of goods sold, rose again on an annualized basis, by 4.5% relative to the fourth quarter.