The big central banks are sometimes accused of groupthink. If that’s true, then the hive mind was misfiring last week. 

U.S. Federal Reserve chair Jerome Powell wasn’t shy about letting the world know that he expects a number of interest-rate cuts next year. Markets loved it, but his counterparts at the European Central Bank and the Bank of England had zero interest in participating in the excitement—ECB president Christine Lagarde and Bank of England governor Andrew Bailey refused to even consider the idea.

Bank of Canada governor Tiff Macklem joined neither side. His year-end remarks amounted to an attempt to split the difference, suggesting that cuts in 2024 were likely, but not anytime soon. 

So yes, confusing, but perhaps a sign that the world is returning to a state where local and regional conditions dictate policy rather than global forces that are largely beyond anyone’s control. 

That the sources of the inflation scare were external in nature contributed to central banks’ slow responses. How many times did you hear that an interest-rate increase in Canada wouldn’t cause China to lift its zero-COVID policy and allow factories to reopen? Or that monetary policy can’t do anything about oil prices?

Yet the higher prices failed to regulate domestic demand, as a pent-up desire to make up for a year of lockdown mixed with unusually high levels of savings caused households to pay whatever price was necessary to buy the goods and services they craved. Companies—especially those in uncompetitive industries, such as grocery—found little resistance in recouping higher input prices at checkout. 

We’re now in a phase where domestic conditions are driving inflation. Statistics Canada said the cost of services, mortgages and rent were the main sources of price pressure in November. Those prices are all determined by domestic factors. Black Friday sales by mobile providers lowered cellular prices, evidence of what a little competition could do for the last mile of the inflation fight. 

The splintering of the central banks is going to create envy because the Fed appears set to cut interest rates much more quickly than its peers, including the Bank of Canada.

Jean-François Perrault, chief economist at Scotiabank, sees the Fed slashing its benchmark interest rate by 1.5 percentage points in 2024, while the Bank of Canada will manage only a percentage point worth of cuts next year.

That gap might come as a surprise to those who got used to watching central banks in the U.S. and Canada track each other. Economic conditions in the two countries have been broadly similar, except for the one measure that keeps popping up as Canada’s main vulnerability: anemic rates of labour productivity. 

The main reason the Fed will cut interest rates faster than its peers is that the U.S. economy has more capacity to generate non-inflationary growth, which economists often describe as potential output.

Potential output is determined to a great extent by productivity. For years, productivity growth has been essentially stagnant in rich countries. It remains stuck in the United Kingdom and among the bloc of countries that use the euro, while Canadian labour’s output per hour worked has been declining for the better part of three years. 

Yet in the U.S., labour productivity surged 5.2 per cent in the third quarter. By this measure, America remains exceptional.

That pays off in multiple ways, including an ability to better cope with inflation. When an economy can generate more output with fewer workers, it has more capacity to absorb spikes in demand or input costs without raising prices. A company that has boosted its margins by investing in cutting-edge technology can afford to pay higher wages, while a company that relies on staffing to keep up with orders is at the mercy of the labour market. 

Canada has more of the latter type of company than the former, which is why the Bank of Canada is so concerned about wage growth. It estimates that Canada’s potential growth rate is about two per cent, and wages are growing at an annual rate of about five per cent. To keep up, Canadian employers can either accept lower margins or raise prices. Guess which option they tend to choose?

The Fed doesn’t face that constraint because U.S. productivity is so strong. Unit labour costs dropped 1.2 per cent in the third quarter, according to the U.S. Bureau of Labor Statistics, while the equivalent measure in Canada increased 1.6 per cent, Statistics Canada reported. 

Central banks can’t do much about productivity. Politicians and executives looking for people to blame for higher interest rates might want to start looking in the mirror. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.