A Summer Slack for Productivity in 2024 Q3 Marginally Supports a Smaller Rate Cut Next Week

Labour productivity appears to have hit another slump as the economy sputtered along—real GDP barely grew and hours worked outpaced any real GDP gains.

Monthly data for hours worked show early signs of a further acceleration in Q4. Assuming real GDP growth is in line with StatCan’s flash estimate, this could imply another quarter of weak productivity. Wage growth increased, implying that unit labour costs remain mercilessly high for businesses. 

Productivity has been a story of serial disappointment in Canada, and the third quarter offered little signs of reversal. The outcome coincides with Canada’s lacklustre investment External link. performance during the quarter, as corporate profits fell.  

While the slack gradually building in the labour market can be expected to dampen wage growth going forward, unit labour costs for many Canadian businesses remain too high to compete with US firms. True gains will only come from increased innovation, faster technological adoption, increased competition, and more efficient skills matching, among the many initiatives that our research External link. has covered extensively. The shrinkage of the available labour pool resulting from restrictions on immigration, combined with lower financing costs, should normally incentivize businesses to invest more to keep operating and expanding. That said, current trade uncertainty is a meaningful headwind not to dismiss.

For the Bank of Canada, at the margin, weak productivity numbers suggest that the non-inflationary room growth in economic activity is slightly lower, making a 25 basis point rate cut slightly more likely than a 50 basis point move after seeing these numbers. However, the jobs numbers on Friday will play a much greater role in determining the actual size of the rate reduction next week.