Labour productivity in Canada’s business sector declined for the first time in two years in the fourth quarter, surprising economists.

“Amidst all of the hoopla on how the Canadian economic data continue to be so impressive, there unfortunately is one sour note in the mix. Canadian labour productivity in the business sector unexpectedly fell in the fourth quarter,” says BMO Nesbitt Burns. “The 0.6% setback was the first decline in two years, and only the second in five years.”

Nesbitt notes that the Canadian numbers are far weaker than the U.S. numbers, where productivity has held up in the face of slower economic activity. “Fourth quarter real GDP was only a touch stronger in Canada, while jobs were created at a much faster pace, accounting for the big productivity gap.”

RBC notes that a 0.9% rise in hours worked, a 0.6% gain in hourly compensation, and a 0.2% increase in GDP all contributed towards a 1.3% rise in unit labour costs which represent productivity adjusted labour costs. “If weakened productivity persists, the impact is negative for corporate profits and equity markets but much of the concern is likely near-term and related to uncertainty in the Middle East. When this effect is lifted, it should translate into firming output and productivity trends, accompanied by higher profitability and market valuations,” it says.

“Canada’s productivity performance in 2002 was an improvement on 2001, but trailed far behind the U.S. — the one key economic variable where Canada is not leading,” concludes Nesbitt. “The large gap is partly a function of the weak Canadian dollar through much of last year — the recent recovery in the loonie may yet lead to stronger productivity gains in Canada.”