Canada boosts productivity but still lags U.S. - Y

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OTTAWA (Reuters) – Canadian businesses squeezed more out of their workers last year than in any year since 2005, but they remained less competitive than their U.S. counterparts as Canada's strong currency pushed up labor costs.

Productivity -- a measure of how much is produced for each hour worked -- rose 0.5 percent in the fourth quarter of last year, beating the market forecast of a 0.2 percent gain and just slightly below the U.S. 0.6 percent gain.

For the year as a whole, Canadian productivity increased 1.4 percent but lagged the comparable U.S. rate of 3.8 percent.

"Productivity growth in Canada still trails that of the United States significantly," said Scotia Capital economists Derek Holt, Gorica Djeric and Sarah Howcroft in a note to clients.

"Given that Canada has fully recovered job losses suffered during the downturn [link widoczny dla zalogowanych], GDP growth will be reliant on productivity picking up going forward," they said.

Productivity has been weighing on the Bank of Canada as it keeps interest-rate rises on hold pending further proof the economic recovery is entrenched.

On March 1, the bank cited "Canada's poor relative productivity performance" and currency appreciation as the two main factors hampering an export recovery, which would rely heavily on U.S. demand. Central bank research shows the Canada-U.S. productivity gap widening in recent years.

The fourth-quarter data's impact on markets was overshadowed by the possibility of a nuclear catastrophe in Japan, which pushed the Canadian dollar to its lowest level since February 11 and caused stocks to fall.

SERVICES LEAD THE WAY

Canadian businesses expanded output by 0.9 percent in the fourth quarter, while the number of hours worked rose 0.4 percent.

The services industry saw productivity jump 0.8 percent, outpacing the goods-producing industries for the first time since late 2009, with retail trade, wholesale trade and finance leading the way. The goods-producing sector recorded a 0.3 percent drop.

The sharp appreciation of the Canadian dollar against the U.S. dollar made Canadian businesses appear less competitive than their U.S. counterparts in terms of production costs.

When measured in U.S. dollars, Canadian labor costs per unit leaped 3.2 percent in the fourth quarter versus a 0.1 percent decline for U.S. businesses. In 2010 as a whole [link widoczny dla zalogowanych], Canadian labor costs ballooned by 11.1 percent, while costs fell 1.5 percent south of the border.

Scotia Capital said data so far suggest the possibility of a weaker productivity reading in the first quarter of this year because of a decline in hours worked.

(Reporting by Louise Egan; editing by Peter Galloway)