Canada's business productivity fell for the second consecutive quarter in early 2026, as rising labour costs outpaced economic growth, highlighting a persistent challenge for the economy. Statistics Canada reported on Wednesday that labour productivity in the business sector decreased by 0.5 per cent in the first quarter, following a 0.3 per cent decline in the final quarter of 2025. The agency described the decline as a "mild contraction" in output pace.
Goods-Producing Sectors Lead the Decline
The first-quarter drop was driven primarily by a contraction in goods-producing industries, where productivity fell by 1.7 per cent. Within this category, the agriculture, forestry, fishing and hunting sector experienced the steepest decline at 3.5 per cent. Construction productivity decreased by 1.3 per cent, while manufacturing saw a 0.3 per cent drop.
Service-Producing Industries Show Modest Growth
In contrast, service-producing industries managed a modest 0.3 per cent increase in productivity. The strongest gains were recorded in information and cultural industries, which rose by 1.6 per cent, followed by transportation and warehousing at 1.2 per cent, and retail trade at 1.0 per cent. Overall, productivity declined in 10 of the 16 main industry sectors during the first quarter.
Productivity as a Measure of Economic Prosperity
Productivity, which measures economic output per hour worked, is widely considered a key indicator of economic prosperity. Canada has struggled with weak productivity growth for decades and lags behind many peer countries, including the United States. The ongoing trade tensions with Canada's largest trading partner have further weighed on the economy, with real GDP in the business sector falling three times in the last five quarters, according to Desjardins economist LJ Valencia.
Impact of Immigration Policies and Trade Uncertainty
Valencia noted that the federal government's immigration policies are expected to slow population growth further. However, uncertainty surrounding the trade war will shape the near-term trajectory of Canadian business investment and productivity. The outcome of this year's Canada–United States–Mexico Agreement (CUSMA) joint review is considered pivotal.
Labour Costs Continue to Rise
As productivity dipped, overall hours worked increased by 0.4 per cent, reflecting a 0.1 per cent rise in the number of jobs. Average hours worked also rose by 0.3 per cent. Meanwhile, labour costs continued to climb for the fourth consecutive quarter. Hourly compensation increased by 0.9 per cent, pushing unit labour costs (ULCs) up by 1.4 per cent. ULCs measure the amount businesses pay in wages and benefits to produce one unit of real output.
Valencia described the acceleration of ULC growth in early 2026 as a worrying sign, as elevated costs continue to undermine Canada's competitive position and exacerbate challenges for businesses across the country.
