Bank of Canada Warns on ‘Vicious Circle’ of Weak Productivity

A worker observes a crane moving floor panels at a prefabricated housing manufacturing facility in Toronto, Ontario, Canada, on Monday, April 7, 2025. The prefabricated housing industry has long touted itself as a way to ramp up the production of new residences to relieve Canada's housing shortage. Photographer: Cole Burston/Bloomberg Photo by Cole Burston /Bloomberg

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(Bloomberg) — The Bank of Canada said the country’s anemic productivity growth is a “systemic” problem, doubling down on its message to governments and businesses to urgently address the issue.

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Speaking in Quebec City on Wednesday, Deputy Governor Nicolas Vincent said Canada is “stuck in a vicious circle” where sluggish business investment limits output per hour worked and wage growth. That reduces consumption and demand, making businesses less inclined to invest in new technology and equipment, further hurting productivity.

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In prepared remarks, Vincent highlighted Canada’s widening productivity gap with other G-7 countries since the 2000s, particularly with the US. The country’s gross domestic product would have been 9% higher, or C$7,000 ($4,979) higher per person, had productivity kept pace with other advanced countries, according to the bank’s research.

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Vincent said closing that gap would have significant benefits for Canada’s economy, including the ability for the country to increase its capacity to grow without incurring inflation. It would also make the country more resilient to economic shocks.

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“Canada’s affordability problem is really a productivity problem,” Vincent said, adding that a key way to grow real incomes is by boosting output per worker so firms can increase wages without increasing output costs.

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That would represent “real growth in our purchasing power,” he added.

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Higher productivity gains can also give government more budgetary flexibility as higher wages and profit mean higher tax revenues that “can provide better public services without raising taxes,” he said.

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Vincent outlined multiple solutions in his speech, saying firstly that the country should focus squarely on drawing investment back into the country. That includes fixing Canada’s regulatory framework and tax regimes, upgrading infrastructure, reducing interprovincial trade barriers and finding new markets other than the US for the country’s exports.

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“Businesses in Canada have been investing too little for too long” and that’s “one of the main reasons for the country’s poor productivity.”

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Increasing competition, investing in human capital and making it easier to recognize professional accreditations across the country are another solution.

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To be sure, Vincent acknowledges the bank’s role is limited to encouraging dialogue on the problem and keeping inflation low, creating conditions that allow “business and governments design and deliver effective solution to improve Canada’s long-term prospects.”

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