25 January 2019

What Canada’s productivity challenge means for your business?

The last 12 months have been something of a mixed bag where Canada’s economy is concerned.

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While GDP growth has slowed somewhat in recent months, the economy continues to expand at a solid pace, and GDP growth is expected to be 2.1% in 2018. Other indicators are also positive: employment increased by 94,000 jobs in November1, while unemployment recently fell to 5.6% – the lowest level since 1976. Recent rate hikes have brought the benchmark interest rate to its current level of 1.75%. 

But alongside these developments, a number of challenges have been brewing in recent months. With oil prices falling and production outstripping takeaway capacity, planned cuts to oil production are expected to dent GDP growth in 2019, particularly in the first quarter. At the same time, despite an initial exemption from new U.S. tariffs pending the outcome of NAFTA discussions, Canada is feeling the impact of tariffs on steel and aluminum (25% and 10% respectively). And NAFTA itself has been replaced by the United States-Mexico-Canada Agreement (USMCA), which was signed by the relevant parties in November, alleviating months of uncertainty.

Facing the productivity challenge

Against this backdrop, a significant productivity challenge continues to threaten the country’s global competitiveness. In 2016, Canada ranked sixth out of the G72 countries for GDP per hour worked. Although productivity rose by 2.1% in 2017 – up from 0.6% in 2016 – Canada continues to lag behind other countries in this area. 

Productivity is a particular concern among the country’s advanced sectors, such as auto and aerospace production, oil and gas extraction and IT. For advanced industries, a 2018 report by the Brookings Institution and the Martin Prosperity Institute found that the productivity differential between the average Canadian worker in a metro area and the average U.S. worker in a metro area had increased from about 17% in 1996 to around 100% in 2015. 

Why is productivity lagging behind?

There are a number of reasons for this productivity shortfall, from slowing output growth to an aging population. A recent report by Deloitte warned that “significant amounts of capital and talent are locked up in underperforming companies”, noting that this needs to be addressed in order to avoid a continuing situation of low growth and slow decline. Zombie companies – in other words, older firms that continue to survive despite persistently struggling to meet interest payments – accounted for at least 16% of those listed on the TSX and TSXV in 2015-2017, according to the report.

Meanwhile, research published by the Canadian Federation of Independent Business (CFIB)3 in November 2018 notes that productivity is lowest in the three Maritime provinces. While small business owners are already feeling the impact of an aging and retiring workforce, the report warns this trend “will have wider implications with fewer workers contributing to the economy and governments dealing with the cost of age-related services.” 

Solving the productivity challenge is key to drive growth

In light of these challenges, there is a clear need for Canadian businesses to increase their productivity in order to remain competitive in the global market. Notable developments include last year’s launch of the Canadian Business Growth Fund (CBGF) that is supported by Canada’s leading banks including HSBC Bank Canada (HSBC) and insurance companies, the fund aims to help Canadian entrepreneurs fund the growth and expansion of mid-market businesses. Areas of focus include:

  • Government support. Respondents to the CFIB study were asked how governments could support small businesses. Seventy-six per cent said that governments could reduce the overall burden of taxes and fees, while 44% cited reducing the overall regulatory burden. 
  • Behaviours for success. Meanwhile, Deloitte’s report recommended five “essential behaviours for lasting success” that Canadian companies can adopt in order to thrive in the coming years: “disrupt with resilience”, “pursue tough decisions”, “nurture your roots”, “drive purpose and impact” and “assert global leadership”. Specific recommendations included mobilising technology and talent, making small bets that could pay off in the long run and actively exploring global opportunities.

Last but not least, there may be opportunities for Canadian businesses to leverage their banking relationships in order to overcome these challenges and boost their productivity. HSBC can help your business:

  • Invest in new equipment. New equipment can help your business be more competitive. Explore HSBC’s financing and leasing options to learn how we can help your business finance new purchases.
  • Digitise financial transactions. Automating payments and simplifying financial transactions through facilities such as global disbursements can free up your workforce to tackle other business challenges.
  • Create efficient working capital strategies. HSBC can help you draft a strong working capital strategy which can strengthen your business operations and your ability to weather uncertainty.
  • Improve sustainable business practices. Working to make your business more sustainable can help you create efficiencies, reduce your footprint – and reduce operating costs.

Finally, HSBC’s global presence means we are well positioned to help companies in Canada embrace opportunities for global expansion. Contact us now to talk about your business’s productivity plan.

1. https://business.financialpost.com/news/economy/canada-posts-record-jobs-gain-despite-concerns-in-oil-sector
2. https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/internationalcomparisonsofproductivityfinalestimates/2016
3. https://www.cfib-fcei.ca/sites/default/files/2018-11/More%20with%20less.pdf

Disclaimers

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

Certain of the products and services offered by HSBC and its subsidiaries and affiliates are subject to credit adjudication and approval. This document does not constitute an offer to provide the services and products described and the provision of such services and products remains subject to contract.

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