The Bank of Canada (BoC) official who put the productivity “crisis” in the spotlight, returned this week with a familiar fix: invest in artificial intelligence (AI). Deputy Governor Carolyn Rogers urged businesses to adopt AI, comparing its productivity potential to the adoption of the internet. BMO chief economist Douglas Porter dumped cold water on those expectations, revealing the crisis isn’t recent, but rather the norm—and the internet adoption didn’t deliver the long-term boosts that many assume. He expects AI will help, but suggests the payoff will be far smaller than the hype.
Canadian Productivity Crisis 101: Wages Rise, But They Buy Less
Productivity is the difference between earning more and affording more. When workers don’t produce more, rising wages become inflationary (whether captured in CPI or not). That’s a big reason younger Canadians—and their peers in Europe—feel worse off, despite wage growth nominally outpacing inflation. Wages are up, but the basket is smaller, and the “security” that previous generations bought with much less income, remains out of reach.
Canada’s productivity problem isn’t new. Growth has been largely population-driven, even before it became a hot-button issue in the 2020s. Most growth has come from adding more people, rather than through innovation or productivity, as one would expect from a country with world-renowned universities. However, this deficit of productivity only became a public concern after BoC Deputy Governor Rogers called it a “crisis” two years ago, an alarm she rang again yesterday.
“This is an echo of her famous ‘break the glass, productivity emergency’ speech from two years ago. Since that speech, some serious upward revisions have left productivity in a less dismal spot,” explained BMO economist Douglas Porter.
Even so, BMO estimates output per hour since the pandemic has grown just under 0.7% annually. It’s weaker than the 1.0% long-run trend, which Porter noted is “already a bit disappointing.”
BoC Doubles Down On AI As The Fix For Productivity Crisis
Deputy Governor Carolyn Rogers pitched AI as the cure for Canada’s productivity shortfall. Her latest speech urged small and medium businesses to invest in AI technologies, comparing it to the adoption of the internet. This follows BoC Governor Tiff Macklem making a similar speech to business leaders last week, albeit a little less elegantly.
It’s a logical pitch, but has anyone actually done the math on the impact in Canada? The internet undeniably transformed business, but did the country turn those gains into a net productivity boost?
BoC Pitches AI As Internet-Scale Productivity Gains, but Canada’s Gains Were Temporary
Since productivity data is only readily available back to the 1980s, BMO used real GDP per capita as a long-run proxy. “And that shows quite vividly the underlying slowdown over the decades, only briefly interrupted by the burst in productivity in the late 1990s/early 2000s,” explained Porter. “That bump was spurred by the widespread adaptation of the internet.”
The “internet moment” we’re all hoping to re-live was a short-lived surge. After companies digitized, productivity resumed its downward trend. Porter hopes AI can replicate some of that shift, but remains mildly skeptical: “The hope is that AI can generate something akin to that surge—here’s predicting a much milder version of that episode over the next 10 years.”
BMO doesn’t directly spell it out, but there are two things hard to ignore. The first is that Canada’s internet-era boost didn’t lead to a permanent acceleration of productivity. It faded as the economy pivoted towards cheap credit and asset inflation. That’s when capital increasingly chased financial returns instead of productivity, producing the housing drag we’ve all come to know and love.
Second, AI presents a big opportunity for productivity gains, but it’s unclear if those are net gains. The risk to growth is whether AI scales faster than workers and institutions can adapt. If it does, the productivity gains concentrate in a winner-takes-all economy, while displacement spreads. In the medium run, it risks being a net drag as the productivity gains are offset by a drag on total economic output as workers are displaced for retraining. As Canada sees long-term unemployment rise to 90s levels ahead of this transformation, there’s a very real threat of productivity churn.
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