March 17, 2008 / 12:40 AM / in 10 years

Canada's productivity tumbles in fourth quarter

OTTAWA (Reuters) - Canadian labor productivity worsened in the fourth quarter of last year, marking the biggest decline since 1995 as workers clocked in more hours on the job even as the economy slowed sharply.

<p>Workers are seen at an auto plant in Oshawa, Ontario in a 2005 file photo. REUTERS/J.P. Moczulski</p>

Statistics Canada said on Friday that productivity -- a reflection of economic output per hours worked -- fell by 0.8 percent from the previous quarter, when it gained 0.1 percent.

The increase in productivity for all of 2007 was 0.5 percent, down from 1.1 percent in 2006, and the weakest gain since 2004.

“This is yet another disappointing chapter in the long-running saga of Canada’s subpar productivity performance,” said Doug Porter, deputy chief economist at TD Securities.

Employees spent 0.9 percent more hours working in the fourth quarter, while poor export sales dragged down economic growth to just 0.1 percent in the same period.

Canada’s productivity, long a source of concern and befuddlement for policymakers, normally underperforms that of the United States.

U.S. productivity slowed to 0.2 percent in the fourth quarter from 1.6 percent in the third, Statscan said. However, its productivity gain for 2007 improved to 1.9 percent from 1 percent the previous year.

“The apparent inertia in Canadian productivity growth over the past years will continue to limit the growth in economic potential for Canada, further widening the chasm with the U.S. economy,” said Millan Mulraine, economics strategist at TD Securities.

Canada’s huge jobs growth through much of 2007 and in early 2008 has stunned markets and was applauded by some as a sign of the economy’s resilience to the U.S. slowdown. But the contradiction between the tight labor market and weak growth had led many economists to predict a dismal productivity outcome.

“The unfortunate flipside to Canada’s powerhouse employment picture of the past year is that output per hour is basically stalled,” Porter said.

The economy slowed to 0.8 percent annualized rate of growth in the fourth quarter, down from 3 percent in the third quarter. In the same period, the economy added an average of 30,000 jobs per month and has since continued to defy expectations with higher-than-expected employment growth in January and February.

“To the extent that this weak productivity trend continues, slow economic growth in Canada will not necessarily mean that Canada’s inflation pressures will ease as substantial hiring could prove necessary just to maintain anemic economic growth,” Mulraine said.

Despite a big jump in the cost of labor in the fourth quarter, up 1.4 percent, the annual growth in unit labor costs of 2.5 percent was seen as mild relative to earlier in the year.

Reporting by Louise Egan; Editing by Peter Galloway

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