Canada’s Labour Productivity Drops 1% in Q2 2025, Steepest Decline Since 2022
A Sharp Setback for Economic Growth
Canada’s economy took a hit as labour productivity fell 1.0% in the second quarter of 2025, marking the largest quarterly decline since Q4 2022 (-1.1%), according to Statistics Canada. This drop, reported on September 3, 2025, underscores ongoing challenges in boosting output per worker amid trade disputes and economic uncertainty.
Details of the Productivity Decline
What Happened?
Statistics Canada data shows that from April to June 2025, business sector productivity—measured as real GDP per hour worked—fell 1.0%, following a revised 0.1% decline in Q1. This missed forecasts of a 0.2% gain, highlighting a second consecutive quarter of contraction. Key drivers include:
- Reduced Output: Business output shrank 0.7%, the first decline in seven quarters, largely due to uncertainty from U.S. tariffs and trade disputes.
- Rising Hours Worked: Hours worked increased 0.3%, but at half the pace of Q1 (0.6%), reflecting slower job growth in service sectors.
- Sectoral Declines: Nine of 16 sub-sectors saw productivity drops, with utilities (-4.0%), wholesale trade (-2.6%), and manufacturing (-2.1%) hit hardest. Construction edged down 0.1%.
Economic Context
The productivity drop coincides with a broader economic slowdown, with Canada’s GDP shrinking at a 1.6% annualized pace in Q2, driven by falling exports. Per-capita output has stagnated to 2017 levels, exacerbating concerns about living standards. Hourly compensation also fell 0.5%, the first decline since Q1 2021, pushing unit labour costs up 0.5% as firms faced higher wage pressures despite lower output.
Why Productivity Matters
Labour productivity, a key driver of economic growth and living standards, measures how efficiently workers produce goods and services. Canada’s persistent productivity struggles—described as an “emergency” by policymakers—stem from:
- Low Capital Investment: A lack of spending on machinery, equipment, and technology limits efficiency gains.
- High Immigration: Rapid population growth outpaces capital investment, diluting per-worker output.
- Trade Tensions: U.S. tariffs, intensified in 2025, have led firms to cut production, particularly in manufacturing and wholesale trade.
Since the pandemic, Canada’s productivity has declined annually, with a 1.8% drop in 2023 alone, contrasting with U.S. gains of 3.8–3.9% in key sectors from 2019–2022.
Impact on Canadians
Economic and Lifestyle Implications
- Higher Costs: Lower productivity fuels inflation, as firms pass on rising unit labour costs to consumers, squeezing household budgets.
- Job Market Strain: While hours worked rose, slower job growth and reduced output signal potential layoffs, particularly in tariff-hit sectors like manufacturing, where 30,000 jobs were lost recently.
- Living Standards: Stagnant per-capita output threatens Canada’s standard of living, with real GDP per capita at 2017 levels, a concern echoed in posts on X about an “orchestrated collapse.”
Policy Responses
Prime Minister Mark Carney, meeting with his cabinet in Toronto in September 2025, pledged to boost productivity through infrastructure investments, redirecting federal spending from consumption to capital projects. This follows his April election promise to enhance Canada’s productive capacity.
Expert and Public Reactions
Analysts like Pedro Antunes of the Conference Board of Canada emphasize that the decline builds on decades of weak productivity growth, predating the pandemic. “It’s not just this decline since 2019,” Antunes said, pointing to structural issues like underinvestment in R&D (1.7% of GDP vs. OECD’s 2.7% in 2022). On X, users like @MarcNixon24 highlight manufacturing job losses tied to U.S. trade policies, while @ShaziGoalie warns of broader economic “breaking” in Ontario, reflecting public anxiety.
Looking Ahead: Challenges and Opportunities
The productivity drop signals deeper structural issues, but solutions are in focus:
- Infrastructure Investment: Carney’s planned projects could boost capital intensity, though results may take years.
- Technology Adoption: Greater use of AI and automation, as seen in U.S. sectors with 30–50% productivity gains, could help, but Canada lags in ICT investment.
- Trade Stabilization: Resolving U.S. tariff disputes, potentially through negotiations tied to the Federal Circuit’s recent tariff ruling, may restore output.
Without action, Canada risks further economic stagnation. The Bank of Canada’s Carolyn Rogers has called productivity a “whole economy issue,” urging comprehensive strategies like promoting competition and reducing regulatory barriers.
Conclusion
Canada’s 1% productivity decline in Q2 2025, the worst since 2022, underscores persistent economic challenges driven by trade disputes, low investment, and structural inefficiencies. While strong employment and Carney’s investment pledges offer hope, Canadians face rising costs and stagnant living standards. Addressing these issues through technology, infrastructure, and trade resolution will be critical to reversing the slide and ensuring long-term prosperity.