September 10, 2008 / 12:45 PM / in 9 years

Productivity sags amid slowdown

OTTAWA (Reuters) - Canada’s labor productivity has fallen for a third straight quarter, the longest decline since 1990, and a track record that analysts said shows businesses are on unsteady footing as the economy flirts with recession.

Productivity, measured as the amount produced by a worker per hour, fell 0.2 percent in the second quarter after declining 0.6 percent in each of the previous two quarters, Statistics Canada said on Wednesday.

That compares dismally with the U.S. record of increased productivity in the first two quarters of this year.

“This matters because sagging productivity is bearish for earnings growth, a negative for overall business competitiveness, and because it further reinforces the point that Canadian businesses are increasingly ill-prepared for a slowdown,” said Derek Holt, an economist at Scotia Capital.

Holt said that Canadians should have outperformed their U.S. counterparts on productivity given the strength of the Canadian dollar, which has lowered the cost of importing machinery and equipment from the United States.

The business sector suffered a 0.2 percent decline in real gross domestic product in the second quarter, largely because of flagging exports, but the number of hours worked rose 0.1 percent, Statistics Canada said.

Overall economic growth in Canada came in at a meek 0.3 percent in the second quarter after a contraction of 0.8 percent in the first, narrowly avoiding the popular definition of a recession as two back-to-back quarters of shrinking GDP.

OIL SANDS

Productivity in the goods-producing industries slid for the fifth straight quarter, pulled down by the oil and gas extraction industry centered in Alberta and by mining and construction.

“The fact that oil sands production is often dug out of the ground with backhoe and truck (albeit using rather uncharacteristically large equipment) does not promote productivity gains as conventional oil production declines,” said Stewart Hall, markets strategist at HSBC Canada.

Manufacturers reversed a two-quarter declining trend to report a 0.8 percent improvement in productivity.

There were signs that inflationary pressures from labor costs were subsiding, bad news for wage earners but a detail that could encourage the Bank of Canada to consider cutting interest rates.

Unit labor costs -- the cost of a worker’s wages and benefits per unit of real GDP -- rose 1.2 percent, easing from a 1.9 percent gain in the first quarter. Expressed in U.S. dollars, costs climbed 0.6 percent, compared with a 0.1 percent decline for U.S. businesses.

U.S. labor productivity rose 1.1 percent in the second quarter, after a 0.6 percent gain in the first.

Annual productivity rates in both countries were roughly the same in 2007, when compared with 2004, at 4.4 percent for the United States and 4.3 percent for Canada, Statscan said.

Reporting by Louise Egan; Editing by Peter Galloway

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