Productivity slumps in third quarter
Ottawa, ON -- With the slowdown in economic activity and the continued rise in hours worked, Canadian business sect...
Ottawa, ON — With the slowdown in economic activity and the continued rise in hours worked, Canadian business sector productivity edged down 0.3% between July and September, 2004, reports Statistics Canada in its third quarter report on labour productivity, hourly compensation and unit labour cost.
With this third quarter slump, productivity continued its lacklustre performance of the previous five quarters. During this period, productivity growth ranged from a 0.2% gain to a 0.3% decline.
The lack of productivity gains, combined with the strength of the Canadian dollar, pushed up the unit labour cost in U.S. dollars in the third quarter. This has adversely affected the competitiveness of Canadian businesses compared with their U.S. counterparts.
Labour productivity, measured as real GDP per hour worked, is an important contributor to the improvement of living standards and the competitiveness of businesses.
The growth in hours worked remained steady between July and September 2004, while output slowed, giving rise to a productivity decline.
In the U.S., productivity increased by only 0.6% in the third quarter, after gains of 1.0% in the first quarter and 0.7% in the second quarter. Over the past four quarters, U.S. productivity has grown an average of 0.7% per quarter.
This is the sixth straight quarter in which Canadian businesses have posted lower productivity than their U.S. counterparts.
Growth in real GDP in the third quarter south of border outpaced that in Canada, a reversal of the situation in the second quarter.
Growth in GDP of Canadian businesses slowed in the third quarter (+0.7%) and was about half the pace achieved in the previous quarter (+1.2%). This slowdown is primarily attributable to the 0.5% drop in exports and the 3.1% increase in imports. Essentially, GDP growth came from final domestic demand, as consumer spending picked up steam while investment advanced 1.1%.
The pace of growth in the real GDP of U.S. businesses in the third quarter remained steady compared with the second quarter at 1.1%. On a quarterly basis, U.S. businesses have seen GDP increases equal to or higher than 1.0% since the second quarter of 2003.
The strength of U.S. activity is mainly the result of a strong recovery in consumer spending by U.S. households. Spending rose by 1.3% in the third quarter, the largest increase since the fourth quarter of 2001 (+1.7%).
Despite the slowdown in GDP growth in Canada, the Canadian labour market continued to be more dynamic compared with the U.S. The increase in hours worked in Canadian businesses, already strong in the second quarter, remained high in the third quarter at 0.9%.
In contrast, the hours worked in U.S. businesses increased by only 0.4% in the second quarter. During the last five quarters, the pace of growth in hours worked in the U.S. has remained virtually the same. On average, hours worked have increased over this period by 0.3% per quarter.
Canadian businesses experienced a decline in their productivity in the third quarter. In comparison, the productivity of U.S. businesses continued its upward trend in the third quarter (+0.6%), although at a slower pace.
The average gap in productivity growth between the two countries remained at 0.8 percentage points per quarter during the last four quarters.
During the third quarter of 2004, Canadian businesses gained a marginal advantage over their U.S. counterparts in terms of their unit labour cost when we do not take account of the exchange rate.
On a year-to-year basis, unit labour cost in Canadian businesses increased by 0.8% during the third quarter, compared with 1.1% in U.S. businesses.
It was the first time since the second quarter of 2002 that Canadian businesses obtained a slight advantage over their U.S. counterparts in terms of unit labour costs when they are expressed in their respective currency. At that time, unit labour costs in both countries had increased at exactly the same pace.
On a year-over-year basis, the growth in labour costs per unit of GDP of Canadian businesses has gradually slowed during the last five quarters, when measured in Canadian dollars
However, this advantage for Canada completely vanishes when the unit labour cost is adjusted for changes in the exchange rate. With the 5.3% appreciation in the value of the Canadian dollar vis–vis its U.S. counterpart between the third quarter of 2003 and 2004, the U.S. continues to hold a clear advantage in terms of unit cost trends.
Unit labour costs for Canadian businesses, as measured in U.S. currency, posted a 6.3% increase annually in the third quarter, while those of U.S. businesses advanced only 1.1%.