Global productivity continues to slow, and this is terrible news for the world economy according to Morgan Stanley. Based on the current levels of productivity, developed market potential output growth indicates that it will now take 56 years for GDP to double as opposed to the previous benchmark of 25 years.
According to Morgan Stanley’s estimates, developed market potential output growth is only 1.25% at present, an estimate that is 0.25 percentage points below the market consensus and official forecasts and a staggering 1.5 percentage points below the output growth of 2.75% predicted in the late 90s.
Morgan’s long-term output projections are even more concerning. Assuming developed markets can return to the pace of growth seen in the late 90s and early 2000’s, potential output growth could average 3% per annum over the next few decades. However, even this high (and optimistic) figure is below the long-term average of 3.6% per annum.
These lacklustre growth figures can be traced almost entirely to weak productivity growth.
The latest US productivity data, which showed another outright drop in output per hour in 2Q16 in what is now the worst run since 1979. The weakness can be attributed to meagre investment spending after the Great Financial Crisis, but also more limited efficiency gains than before.
If new technologies were able to push productivity growth back to its long-term average of around 1.5%Y in the US and around 1.8%Y for the OECD, global growth prospects would brighten materially but is this likely?
The productivity puzzle
It’s almost impossible to answer this question. For a start, it’s impossible to tell if productivity growth is being measured accurately given the rise of free digital content.
Another measurement issue stems from the fact that quality improvements are not correctly accounted for in inflation figures which don’t differentiate between products getting more expensive because of better quality and products simply getting more expensive. But despite these factors, Morgan’s analysts don’t believe measurement issues are the main problem behind the productivity slowdown:
“None of the measurement issues are new though, nor are they likely to have worsened materially, leading us to conclude that it is unlikely that measurement errors can explain the productivity slowdown:
(1) Measurement issues regarding IT hardware were already significant prior to the recent productivity slowdown.
(2) Many consumer benefits are occurring outside the economic market place. Smartphone apps make consumers more productive in their free time, but don’t necessarily boost productivity at work.
(3) Productivity slowed in many countries and there is no systematic relationship between the productivity slowdown and ICT intensity
(4) Estimates of the consumer surplus due to digitalisation are falling way short of ‘missing output’ resulting from slower productivity growth.”
Part of the productivity puzzle could simply be that falling productivity reflects a shift in the sector composition from high-productivity towards lower-productivity production away from developed market economies towards emerging market economies where productivity is lower is another theme to consider.
With automation now threatening to take over the jobs of thousands of workers the productivity puzzle could be on the verge of being solved. However, this comes at the cost of thousands of job losses. So what’s the solution to the productivity puzzle; Morgan has some ideas:
“In addition to technological innovation – such as automation – structural reforms and trade liberalisation will be needed to revive DM productivity growth, in our view: Only in a flexible economic setting can the efficiency gains driven by technological innovation take hold and be transferred across countries… very easy monetary policy, while helpful for growth in the near term, could also be hindering productivity growth in the long term by keeping unproductive firms alive and preventing the reallocation of resources.”
Photo by MLazarevski