The economies of many of Canada's biggest trading partners may be growing faster than expected, but the Bank of Canada warns we may not be in a position to take advantage of the improvements.
In the January edition of its quarterly economic outlook, the central bank pointed to a number of countries with economies that are now beating expectations.
Led by China, the global economy is set to grow by four per cent this year, the bank said, noting that growth south of the border has also "significantly improved of late."
But Canadians are hard-pressed to take advantage of increasing U.S. demand, the bank said, because of a combination of factors including the soaring loonie, relatively stagnant productivity gains and high labour costs.
"The cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high," the bank said, reiterating the statements issued in its interest rate announcement one day earlier.
At a press conference Wednesday morning, Bank of Canada Governor Mark Carney said turning that situation back in Canadians' favour amounts to, "a big hill to climb."
Talking to reporters in Ottawa, Carney said, "We have not made the productivity gains that we would need in order to retain market share, let alone gain market share."
Canada's economy is nevertheless in a period of "rebalancing" and "relatively modest" growth that should see an expansion of about 2.4 per cent this year and 2.8 per cent in the next.
That's shy of the better-than-predicted 3.3 per cent the bank now expects the American economy to grow this year.
"While near-term growth prospects in the United States and other foreign economies have significantly improved of late, competitiveness challenges are expected to leave the projected profile of Canadian export growth only slightly stronger than previously anticipated," the bank said in the report issued Wednesday morning.
But that doesn't necessarily mean the Canadian economy is weak, the central bank said, noting that Canada has not only replaced the jobs lost during the recent slowdown, but its economic output has also returned to pre-slump levels thanks in large part to continued consumer spending.
In light of consumer debt levels now reported to be at all-time highs, and the recent tightening of mortgage rules, the bank expects spending to slow this year.
In its place, Carney says businesses will need to both invest more and export more in order to bolster the economy going forward.
In the meantime, the Bank of Canada says "risks to the inflation outlook are roughly balanced."
Ian Lee, of the Sprott School of Business at Carleton University in Ottawa, said Carney's call on businesses to take steps to bolster productivity requires a multi-faceted response.
Businesses must invest in new, labour-saving, productivity-enhancing technologies "that will push them up the productivity curve," Sprott told CTV's Power Play.
But the federal and provincial governments must also address productivity-killing protectionism, which has created a "competitiveness problem" in Canada.
Sprott points out that Canada's productivity is growing by 0.5 per cent per year, while productivity is growing in the U.S by two per cent annually.
"To be very blunt, our economy is more protected than in the United States," Sprott said. "The United States is one of the most open and competitive economies in the world. Competitiveness drives productivity."
Sprott said officials must address protectionism in industries such as airlines, banking and natural resources, as well as trade barriers between provinces, "if we want to get our productivity up."
"The United States has had free trade within the United States since the Civil War, and we still don't really have complete free trade inside Canada," Sprott said.
