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Loonie's strength puts pressure on productivity Add to ...

Canadian companies are bleeding market share abroad, restraining the economic rebound in the crucial post-recession period.

Policy makers and economists have warned for years that Canada's competitiveness has been eroding in the United States and around the world while other countries have been making big strides.

With the soaring Canadian dollar already eating into exports, companies are now being urged to find ways to produce their goods more efficiently. Labour productivity in Canada - a measure of what the economy produces in each hour of work - has grown by an average annual rate of just 0.5 per cent since early 2005, a far cry from the 2.1-per-cent annual rate of growth in the United States. The discrepancy means companies haven't positioned themselves to take full advantage of improved prospects for the global recovery.

For two days now, Bank of Canada Governor Mark Carney has ratcheted up his warnings that Canadian companies must do more on this front, or else miss out as the global economy rebounds.

"We have not made the productivity gains in order to retain market share, let alone grow market share,'' Mr. Carney told reporters in Ottawa.

The higher loonie provides an opportunity to invest in the type of state-of-the-art, foreign-made machinery that can help companies become more efficient, Mr. Carney argues. Business investment started to turn around in the summer after representing a soft spot in the early part of the recovery, but that nascent rebound is really a bare minimum, Mr. Carney suggested Wednesday.

"We're starting to see the investment, businesses starting to restructure, but this is a long road,'' he said. "It's a big hill to climb.''

Already, the central bank's forecast shows, Canadian competitiveness has plunged in part because unit labour costs in Canada - when adjusted for exchange rates and inflation - have surged 31 per cent against those in the United States since 2005. The loonie's ascent since 2005 accounts for about two-thirds of that increase, the bank said, but since wage growth in both countries has been similar over that stretch, Canada's "productivity underperformance'' explains the rest.

"Canada has lagged behind the U.S. in terms of productivity for a long time, except now the issue is more pressing because we have a Canadian dollar which is really strong and will remain strong,'' said Krishen Rangasamy, an economist at CIBC World Markets.

A report last month by Mr. Rangasamy showed Canada has suffered a "stunning loss of market share'' in the United States for exports of most goods, with the exception of a clutch of resources.

China overtook Canada as the leading exporter to the U.S. in 2009, but countries like Mexico have also reaped the spoils of the strong loonie, which the central bank's forecast assumes could be at par for the better part of the next two years.

According to Sal Guatieri, an economist at BMO Nesbitt Burns in Toronto, Canadian auto parts makers have watched their share of U.S. imports fall to a record-low 15 per cent while similar Mexican companies saw their share soar to a record-high 30 per cent. That shift came over the past eight years as the loonie appreciated 76 per cent against the Mexican peso, he said.

Craig McIntosh, chief executive officer of Acrylon Plastics Inc. in Winnipeg, says he's not convinced that Canadian manufacturers are really that unproductive, arguing that small- to medium-sized factories may have less equipment than their U.S. competitors but they get more out of it - making them much more productive per labour hour.

"If you are equating equipment with productivity, yes, we're lagging,'' said Mr. McIntosh, whose company makes plastic parts for farm machinery, buses, windows and playgrounds. "But if you are talking about actual dollar value of output per employee, at least in my industry ... we way outperform."

Mr. McIntosh said he worries about long-term demand, and that the still-tenuous state of the U.S. recovery, coupled with the high currency, are making him cautious about planning for the future and hesitant to invest much right now to improve productivity.

"Today, nobody has that feeling of confidence that it is going to be better 24 months out or 12 months out because we still hit these sort of gaps at times - suddenly demand just drops off," he said.

One of the country's foremost experts on productivity, though - Andrew Sharpe of the Centre for the Study of Living Standards - cautioned that comparisons between Canada and the United States can be misleading, since many American manufacturers boosted their productivity during the recession by gutting their work forces.

"The U.S. is doing fantastic in terms of productivity growth, but it doesn't seem to be trickling down," Dr. Sharpe said. "In the long run, obviously we want to improve productivity as a key goal for society. But in the short run, it's much better that we have low unemployment relative to the U.S. and certain other countries.''

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