Bank of Canada Governor Tiff Macklem warned in October 2024 that a world more exposed to supply shocks made stronger Canadian productivity increasingly important. Higher productivity allows the economy to produce more with the same labour and resources, supporting incomes and growth without automatically creating additional inflation pressure.
What Macklem was addressing
Macklem spoke to reporters in Washington during meetings of the International Monetary Fund and World Bank. His comments came two days after the Bank of Canada reduced its policy interest rate by half a percentage point to 3.75 per cent, as inflation had returned around the bank’s two per cent target and economic demand was no longer overheated.
The rate decision and the productivity warning concerned different time horizons. Interest-rate changes influence borrowing, spending and inflation over the near to medium term. Productivity is a structural measure of how effectively an economy turns hours, equipment, technology and knowledge into output. It cannot be fixed by a single central-bank rate move.
Why supply shocks complicate inflation control
A supply shock reduces or disrupts the economy’s ability to provide goods and services. A pandemic, war, blocked shipping route, extreme weather event or sudden shortage of a critical input can raise costs while weakening growth. That combination is harder for monetary policy than excess demand, because higher interest rates cannot manufacture missing products or reopen a supply chain.
When productive capacity is stronger, businesses may be better able to absorb disruption, shift production and meet demand. Sustained productivity growth also raises the economy’s non-inflationary growth potential. The relationship is not mechanical—companies can still raise prices and shocks can still be severe—but weak productivity leaves less room to grow before capacity constraints become a problem.
Canada’s longstanding challenge
Canadian policy makers have repeatedly identified weak business investment and slow productivity growth as economic vulnerabilities. Possible improvements include investment in machinery, digital systems, research and employee skills; better competition; fewer barriers to scaling a business; and infrastructure that allows people and goods to move efficiently.
Not every technology purchase produces a gain. Businesses must reorganize work, train staff and measure results. Likewise, productivity should not be confused with making employees work longer without added support. It concerns output per unit of input and can improve through safer processes, better tools and reduced waste.
Limits of the central bank’s role
The Bank of Canada’s mandate is price stability, centred on a two per cent inflation target. It can moderate demand through interest rates, analyze supply capacity and communicate risks, but most policies governing competition, training, taxation, infrastructure and innovation belong to governments and the private sector.
Macklem’s central message was therefore about resilience. With geopolitical conflict, climate events and supply-chain interruptions becoming more prominent, Canada needs the capacity to adapt while preserving stable prices. Productivity is not a quick cure for a specific disruption, but over time it can support higher living standards and give the economy more room to respond. The warning was not a forecast that every shock would cause inflation; it was an argument for strengthening supply capacity before the next disruption tests it.
