Canada gains competitiveness in terms of unit labor costs, exports likely to be major source of growth in 2016

Canada's labor productivity in Q4 2015 grew slightly by 0.1% after growing 0.4% in Q3 2015. Hours worked remained flat at 0.4% growth, whereas business-level GDP rose 0.1%. The growth in productivity was due to 0.4% growth in service sector that was countered by a drop of 0.6% in goods-producers. A major decline in construction productivity by 1.9% mainly led to the fall in goods producing industries and not because of manufacturing, where productivity grew 0.1%.

Labor costs, in terms of US dollar, declined for the second consecutive quarter by 1.2% in Q4. The overall productivity for 2015 declined 0.2% after growing 2.5% in 2014 and 1.3% in 2013. The fall in the annual rate was due to 5% drop in construction and 0.9% decline in manufacturing. Meanwhile, service industry productivity increased 0.5%.

In Q4, unit labor costs increased 0.8% after falling by 0.5% in Q3. For the entire 2015, hourly compensation net of productivity growth increased 1.4%. This is the fifth consecutive year where pay growth surpassed productivity.

Even though there was a slightly positive side to the data during the year-end, 2015 as a whole witnessed the weakest growth in productivity in three years as hours worked outpaced productivity slightly. Nevertheless, this is due to very strong growth in productivity in prior years. On an annual basis, average gain continues to be around 1% since 2011, consistent with longer-term trends.

Relatively, in unit labor costs (ULCs) terms, on a US dollar basis, Canada has attained significant competitiveness. The nation's ULC's dropped almost 20%, surpassing NAFTA partners. This supports the view that exports are expected to be an important source of growth in 2016. However, on a long-term basis, there is a gap between changes in productivity and compensation growth. The continued growth gap creates the threat of longer-term competitiveness pressures, mainly as the Canadian dollar slowly appreciates over a long-term basis.