The labour productivity of Canadian businesses fell for the first time in more than a year in the fourth quarter, Statistics Canada reported today.

In the fourth quarter, productivity lost 0.8%, after posting a slight 0.1% increase in each of the previous two quarters, and a 0.5% gain in the first quarter.

BMO deputy chief economist Douglas Porter called the data “yet another disappointing chapter in the long-running saga of Canada’s sub-par productivity performance.” He said policy makers should be forewarned that GDP growth is likely to be lower than previously expected. “The unfortunate flipside to Canada’s powerhouse employment picture over the past year is that output per hour basically stalled.”

StatsCan said the Q4 drop occurred as gross domestic product (GDP) growth slowed while hours worked continued to increase steadily. By definition, productivity improves when the GDP rises more than hours worked.

“The drop in productivity in the quarter is disappointing as it implies greater upward pressure on overall prices coming from labour costs,” wrote RBC assistant chief economist Paul Ferley, in a note. “This does suggest some upside risk to the inflation outlook. However, actual inflation numbers has generally becoming in below target.”

For 2007 as a whole, labour productivity increased a mere 0.5%, the lowest annual increase since 2004.

For U.S. businesses, labour productivity slowed significantly in the fourth quarter, increasing only 0.2%, after rising by 1.6% in the third quarter, StatsCan said.

Despite this slowdown, U.S. businesses had a revised growth of 1.9% in their productivity for all of 2007, an improvement compared to the 1.0% for 2006.

In 2007, US businesses had higher productivity gains than their Canadian counterparts. During the previous two years, the differential in annual productivity growth between the two countries was slightly in favour of Canadian businesses, the federal agency said.

Ferley expects the Bank of Canada to continue to cuts rates at its next meeting on April 22. “The growing risk of the US economy slipping into recession will keep the Bank of Canada easing policy,” he said.