It was alarming on March 26, 2024 when Carolyn Rogers, Senior Deputy Governor of the Bank of Canada, said it was “Time to break the glass” because Canada’s productivity is so low that the Canadian economy is in a state of emergency -- and this is after a prolonged period of higher interest rates.
Why is the Bank of Canada raising the alarm, and what dramatic change is needed to jolt the Canadian economy on to a path towards sustainable growth and prosperity?
Kudos to Rogers for creating a new expression on the internet, but this is also cause for alarm. The expression should have been used to describe a burning hot economy that needs to be controlled quickly, but this may be the first time that an axe comes in handy to break through a frozen economy.
In case of fire, public institutions keep onsite a hose, extinguisher, or axe in a locked cabinet with a glass panel. This is to ensure that only in an emergency would someone break the glass, which is dangerous in itself, to access the equipment to put out the fire to save lives and property, subject to some property damage from using the equipment. To break the cabinet’s glass would be a daunting decision of life and death.
For the Bank of Canada to use such a dramatic expression to describe a state of emergency in the Canadian economy that is not even appropriate means our economy is in uncharted territory. In other words, the old ways don’t work anymore.
The conundrum is that Canadian productivity is so low that it is in a state of emergency – most likely in need of a defibrillator to be resuscitated. That is why the Bank is raising the alarm for immediate action.
The Bank looked at how the Canadian and the world economy have changed since the early days of inflation, and found that reduced globalization, changing demographics, climate change, and global trade issues are making inflation difficult to control. The problem is bigger now than in the past few decades. The only way the Bank sees to overcome these inflationary factors is to have higher productivity, and to look at why productivity is so low.
Why higher productivity? An economy that has faster growth, more jobs, and higher wages combined can beat inflation in the current scenario.
According to Statistics Canada, Canada’s labour productivity eked out a small gain at the end of 2023 after six straight quarters of falling productivity –most likely due to a massive intake of immigrants. The federal government announced that in 2022, it had received approximately 5.2 million applicants, double the 2021 intake, and welcomed 431,645 immigrants; however, Statistics Canada reported the total immigrant population grew by a record 1.05 million in 2023. But, big increases in population did not convert to big increases in productivity.
Although the Bank credited the resourcefulness and ingenuity of Canadian business leaders during the pandemic, their productivity did not recover post-pandemic. In fact, productivity is now where it was about seven years ago. This is a big concern for the Bank.
The Bank stressed that increasing productivity does not mean working harder, longer, or taking less time off work. Instead, it is looking at how productivity can be increased by creating more value from people when they are working. When a company increases productivity, it means there is more revenue to pay higher wages without raising prices. Higher productivity helps the economy to be more resilient, too, and that generates more wealth for everyone -- workers, businesses, and central bankers.
Productivity is measured in an economy by how much value the economy is producing per hour worked, or by the growth rate of that productivity. Canada has been struggling on both measures for a while, but since 2022 Canada has been behind all of its G7 peers, except for Italy.
According to the Bank, the best way to improve the Canadian economy is to have a combination of high-value industries, and a strong productivity growth that is spurred by improving efficiencies in existing industries.
Although the Bank acknowledges the greatest productivity comes from start-ups led by entrepreneurs with groundbreaking ideas, it is still focusing on established large companies, knowing that for the past 50 years these companies have been loath to invest in their own capital and their own employees --unless there is a government hand-out, and often this hasn’t produced the desired results.
In 2022, Canada has the most educated workforce in the G7, and also provides good financial and advisory assistance for innovation; yet Canada still struggles to capitalize on these assets. This means there are broad components in the economy that are still missing.
The Bank did not fill these gaps when its suggested fixes to revive the economic patient are pathetically the ineffective tools currently available.
What is needed is a bold transformative economic model that engages the different levels of government, businesses, and consumers. Governments are needed to enact policies and provide appropriate subsidies to create the market conditions for this change to happen. Businesses are needed to create the jobs and goods; and consumers are needed to buy the desired goods. Without all three players engaged at the same time, it won’t work.
Fossil-fuel sustained Canada’s 20th century’s economic growth because it had the support of governments, businesses, and consumers, but it no longer works. What Canada needs now is a low-carbon economy with a price on carbon that is a powerful economic growth tool. it is the only type of transformative economy that needs governments, businesses, and consumers to work properly and it would quickly revive Canada’s productivity immediately. This would benefit the entire country, and be sustainable for the next eighty years.
The emergency action for Canada’s deathly sick economy is a national cap-and-trade program that is combined with the implementation of circular economy policies to reduce waste and conserve energy. Together, they would be the much needed drivers to revive productivity. They would add high-value industries, and new cost-saving efficiencies in existing companies. A bonus would be to bring cap-and-trade back home. It was created by Canadians and first used to successfully remove acid-rain in the Great Lakes.
Unfortunately, this won’t be happening soon. The current Liberal government is fighting for political survival, and the recent federal budget focused on offerings popular with voters. Knowing how badly the carbon tax and carbon tax rebate have been received by voters, this is understandable. This means nothing will be done until after the next election, if the Trudeau government survives, and if we’re lucky. Until then, Canada’s economy will have to wait for the glass to be broken.
Sharolyn Mathieu Vettese
President
SMV Energy Solutions www.smvholdings.com