three components : the nominal exchange rate, relative hourly compensation and relative productivity ( chart 12 ). since the beginning of 2005, the appreciation of the canadian dollar explains about two - thirds of the increase in unit labour costs in canada vis - a - vis the united states. wage growth in the two countries has been broadly similar over the period, leaving productivity underperformance to account for the remaining deterioration in this measure of competitiveness : labour productivity in canada has grown at an average annual rate of just 0. 5 per cent since the first quarter of 2005, compared with 2. 1 per cent in the united states. after a long period of productivity underperformance starting in the 1970s, productivity growth in canada accelerated in the second half of the 1990s, keeping pace with a roughly coincident pickup in u. s. productivity growth ( chart 13 ). but since 2001, productivity growth bis central bankers ’ speeches in canada has slowed to historically low rates. it has languished well below u. s. rates, and has been at the low end compared with our competitors in the u. s. market. this is showing up in our international rankings across a range of competiveness measures. for example, the world economic forum, while rating canada ’ s banking system the soundest in the world three years in a row, dropped canada ’ s ranking in world competitiveness from 7th in 2000 to 10th in 2010. enough measurement. what do we need to do to restore canada ’ s sagging competitiveness? restoring competitiveness the public sector plays an important role in creating conditions to support productivity growth, and it is important to recognize that successive governments in canada have done many of the right things. canadian businesses benefit from a sound policy environment with low and stable inflation, sustainable fiscal policy, and well - regulated financial institutions. a series of important trade agreements have improved access to key markets, and tariff reductions have lowered the cost of intermediate inputs. in addition, a number of measures have substantially improved canada ’ s tax competitiveness for new investment, making it among the most attractive in the industrialized world. but while the public sector can sow the seeds of productivity gains, it is up to the private sector to reap the harvest. and it is time for business to step up and deliver. that means getting on with the job of investing, innovating, developing new markets, and finding new, more efficient ways of organizing and executing production. needless to say, there

tiff macklem : canada ’ s competitive imperative – investing in productivity gains remarks by mr tiff macklem, senior deputy governor of the bank of canada, at a productivity summit series luncheon, edmonton, alberta, 1 february 2011. * * * introduction i am honoured to be here to launch productivity alberta ’ s luncheon series. in addition to offering opportunities like today ’ s to network, learn, and discuss, productivity alberta is providing leadership and vision – together with practical tools and resources – to support business and industry in enhancing their competitiveness. canada ’ s advantages were very apparent through the financial crisis. they sheltered us from the worst of the storm and put canada at the front of the pack coming out of the recession. indeed, canada ’ s international brand for sound economic and financial management has rarely been stronger. this is an opportunity to capitalize on, but only if our relative success does not blind us to our own vulnerabilities. as the title of my remarks suggests, today i want to talk to you about the erosion of canada ’ s international competitiveness in recent years, how this is affecting the canadian economy, and the competitive imperative for businesses in canada to sustain a durable rebound in investment spending and translate this into productivity gains. with household balance sheets stretched and fiscal stimulus set to wind down, the canadian economy must regain its competitive edge to sustain a lasting expansion. of course, this is easier said than done. business decisions to invest and innovate inevitably entail risk. and we continue to face elevated global risks. in this environment, it may be tempting to conclude that the best business strategy is to delay investing until risks recede. this appears misguided. our competitors are not waiting. they are raising their game. so while investment is not without risk, failure to invest will almost certainly doom canadian business to a continuing loss of competitiveness and a shrinking share of global markets. this need not be our fate. indeed, after a very sharp decline through the recession and a delayed recovery, business investment in canada is finally rebounding strongly. but it is still 15 per cent below its pre - recession level. there is much lost ground to make up. moreover, while individual firms can point to many investments that have produced tangible productivity gains, at the aggregate level, the productivity dividend of the investments made over the past decade has been alarmingly low. this has to change. we need more investment that enhances productivity and improves our international competitiveness so