In this week’s The Seven…

• Better together - Productivity and diversification
• Feeding the world - Agriculture a productivity growth leader
• Getting jammed - The productivity cost of transportation bottlenecks
• U.S. inflation - An assist from productivity
• Speaking of diversification - Alberta passes B.C. in venture capital spending
• Momentum is building - Alberta housing starts hit 9-year high
• Jasper update 
• Interesting Fact: Inflation bites long after it fades
• Chart of the Week: Productivity drain - Weak business investment in Canada

“It’s been a hard day’s night, and I’ve been working like a dog”

— The Beatles

OK, maybe not the best song choice to make a point about productivity. The Beatles are one of the most productive bands in history, selling over 500 million records. But this classic, released in 1964, is about working around the clock; productivity is about working smarter, not harder—finding efficiencies and extracting more value from limited resources.

Given Canada’s productivity problem, the topic has emerged from economist backroom debate to public discourse. It’s even been called an “emergency” by Bank of Canada Senior Deputy Governor Carolyn Rogers.

Playing off strengths - Alberta’s productivity story

There’s been lots of coverage on the national story, so we decided to look at this from an Alberta angle (though we do summarize trends in Canada).

In case you missed it, our research report dives into detailed industry data with a focus on how labour productivity is responding to the massive drop in energy investment since 2014.

Why should I care? Improvements to labour productivity—our country’s ability to turn effort (hours worked) into output—is linked to higher living standards and wages. It also matters to inflation (see below). With the population aging and more people retiring, productivity will need to carry the economic weight.

Main findings

Elevator pitch (5 floors): Alberta has higher levels of labour productivity than the other provinces, but the gap has narrowed over the last decade.

Elevator pitch (15 floors): There are important industry dynamics at play. The main (but not entire) reason for Alberta’s productivity advantage is industry mix—that is, Alberta has more workers in higher-productivity sectors (namely oil and gas and related). But over the last decade, growth has slowed significantly in part because of a shift in the workforce away from higher-productivity sectors, as well as a slowdown in service sector productivity.

Elevator pitch (30 floors and  thinking how long is this guy going to talk to me about productivity?) Diversification and productivity are often treated as separate topics. They shouldn’t be. Industry mix matters. The energy sector is a highly-productive sector, so retaining Alberta’s advantage will involve playing off that strength for the foreseeable future.

But there are new opportunities emerging for workers in other sectors. And there’s good reason to believe that Alberta is better positioned to do both (excel at energy and still diversify). The oil and gas sector is not drawing as many workers and putting the same pressure on wages as in the past, and record migration inflows have added to the supply of labour. The diversification door has widened.

Stepping away from industry mix, there are some things that can improve productivity across all sectors—investing in machinery and technology, transportation corridors, freer internal trade, streamlined regulatory approvals for major projects, small business growth, more commercialization of research, improved training, and better matching skills to workers, to name just a few.

Here’s a list of “Ten Ways Out of the Productivity Trap” released this week. Top of the list is business investment (see our Chart of Week). Also acknowledged is the important role of the oil and gas and mining industry in bolstering Canada’s productivity.

The question we posed on Wednesday was: what does “productive diversification” look like to you?

The main view coming across our desk is that Alberta should diversify in a way that plays off its energy strengths. One reader put it this way: “we can walk and chew gum at the same time.”

Agriculture - A productivity growth leader

Speaking of productivity… There is lots of talk about weakness overall, but there is one place where labour productivity growth has been rock solid—agriculture.

This is an industry that continues to innovate, improve yields, and mechanize in the face of labour challenges. Agriculture productivity can ebb and flow with the weather—there was a big hit during the 2021 drought—but the trend has been firmly positive.

Agriculture labour productivity (real GDP per hour worked) in Alberta has more than doubled since 2000. That represents a compound annual growth rate of 3.3% vs. 0.6% for the economy overall. 

Speaking of diversification…

Who said Alberta couldn’t be a major player in tech? It’s part of the diversification story that we talked about in our productivity report.

Just yesterday, the Canadian Venture Capital and Private Equity Association reported that Alberta attracted $383 million across 41 deals in the first half of 2024, the third highest value among the provinces—surpassing B.C. The largest deal was from Calgary-based ClearSky Global.

Some calm returns to markets, as major indices recover

After recent turmoil in the financial markets, finally some summer calm. The markets have been resetting expectations, moving lower with any hint that the soft landing may not go as planned. Turns out equity markets may have swung too far given that the economic fundamentals really haven’t changed that much.

As of closing on Thursday, the S&P 500 had more than recovered from the early August correction (relative to July 31), with the TSX Composite also nearly recovered.

Building momentum - A solid trend in Alberta home starts

Home construction is on a roll in Alberta. July housing starts, released this morning, clocked in at 50,600 (annualized, seasonally adjusted)—the highest level since March 2015. That’s not a one-off observation. The trend has been positive since mid-2023, with the six-month moving average reaching its highest level since the building boom of 2006-07.

Last month, Calgary CMA led with 29,100 annualized starts—it’s third highest month since at least 1990 (earliest comparable data). This is good news given that the city’s population grew a staggering 6% last year. Starts in Edmonton also advanced, hitting an annualized 18,500.

Driven by ongoing increases in multi-units, year-to-date starts in Alberta have jumped 49.0% above the first seven months of 2023, compared to a fairly flat (+0.5%) reading in the rest of Canada.

Back in June, we noted that stronger home construction was one of the factors expected to push Alberta’s GDP growth ahead of the national average. The data since we made that call, which have shown Alberta separate itself from the provincial pack, have been firmly supportive.

Many more homes still need to be built in response to record migration. But under challenging circumstances—labour constraints, higher interest rates, and increased costs—builders have stepped up to the plate.

Jasper update

Recognizing that the negative impacts of wildfires go far beyond financial considerations, we are monitoring economic impacts on the residents of Jasper and the broader Alberta economy. Here is what we have recently learned:

• Although still classified as out of control, the perimeter of the Jasper Wildfire Complex is 78% contained or controlled and Parks Canada says that the northwest perimeter of the fire that presents a risk to the Jasper townsite is 99% contained or controlled.
• Jasper’s 5,000 residents can start returning to the town today (August 16). This does not include tourists and Jasper National Park remains closed.
• Figures presented earlier this week by Jasper’s Chief Administrative Officer indicate that the wildfires destroyed 358 structures and caused $283-million worth of property damage, including the loss of about 800 housing units. The loss in annual property tax revenue is estimated to be $2.2-million.
• The impact to local tourism will be substantial. The wildfires hit during peak tourism. A recent survey by the Tourism Industry Association of Alberta finds that two-thirds of businesses won’t return to previous season’s revenues for at least seven months, and that total revenue losses for businesses could hit as high as $4.5 million per day. That roughly lines up with our early estimate of well over $200 million tourism spending at risk in the Jasper area during the third quarter.
• Many roads through the Jasper area remain closed, but Highway 16 has reopened at reduced hours and with no stopping allowed. The Canadian National Railway line that runs through the Park has resumed operation.

Interesting Fact…inflation is cooling, but it’s still biting

Next week we get Canada’s inflation report for July, and we expect to see more signs of a cooling trend ahead of what we believe will be a September rate cut by the Bank of Canada.

But even as inflation softens, consumers continue to feel the pinch. In fact, Statistics Canada reported yesterday that in spring 2024, nearly half (45%) of Canadians said that rising prices were greatly affecting their ability to meet day-to-day expenses, 12 percentage points higher than what it was two years earlier (33%). This isn’t shocking. A falling inflation rate may belittle comfort when price levels are so much higher than before (the Canadian CPI is up 16.8% since January 2021). Add in a softening labour market and consumers are cutting back.

Food for thought - Could high prices cure high prices? In the U.S., the CEO of Amazon says consumers are trading down and bargain hunting. With less appetite to pay more, could companies be forced to cut prices?

Chart of the Week: Productivity drag - Sluggish business investment in Canada

In our paper, we talked about business investment being one of the culprits behind weak productivity growth in Canada. How bad is it? Business investment—including machinery and equipment, non-residential structures and intellectual property—is still 14% below the peak in 2014 (as of the first quarter of 2024) and now at 2011 levels. Energy investment has fallen a lot since then, but no other sector has been able to fill the gap, with Statistics Canada noting that investment weakness has been “pervasive across industries.” The C.D. Howe Institute has noted that the gap between investment per worker in Canada versus the U.S. has widened considerably, particularly in the areas of intellectual property and machinery and equipment.

Answer to the previous trivia question: Dhaka is the capital of Bangladesh.

Today’s trivia question: Approximately how many kilometres of pipeline transporting crude oil, natural gas, natural gas liquids, and refined petroleum products are there in Canada?