Productivity: A Surprise Upside Risk to the Global Economy?


  • Global labor productivity – GDP per hour worked – has been in a slump for years. But when we look at the state of


    in 2017 from the bottom up, we see underappreciated productivity growth potential.

  • The productivity gap between leading firms and laggards has widened dramatically in recent years. Laggards can play defense for a while – creative destruction takes time – but


    they will converge toward the productivity frontier or exit. Several microeconomic catalysts could push creative destruction into high gear.

  • A productivity rebound isn’t PIMCO’s baseline outlook, but we see rising upside potential. For investors, a global productivity rebound could mean higher interest rates and steeper yield curves – and it could boost the resilience of the global economy in the face of several looming secular risks. Bottom line: don’t rule out a global productivity rebound in the coming years that ushers in “old normal” global GDP growth.

Is productivity dead? It is no secret that global productivity has languished in the post-financial-crisis years – with precious little evidence of a turnaround. If robust productivity growth were indeed a relic of the past, the long-term consequences for investors would be profound: Lower-for-even-longer interest rates would prolong the pain for yield-starved savers, pension funds and financial institutions; equity markets might underwhelm in a low-growth world; and PIMCO’s New Neutral might begin to look permanent.

But what if amidst all the doom and gloom there were a productivity-revival story in its infancy? That world would look starkly different. Imagine: World growth stages a comeback, interest rates normalize to the benefit of fixed income investors globally, and fears of secular stagnation give way to a renewed optimism in our future economic potential.

The productivity question couldn’t be more important. After all, there are only two ways to grow an economy: boost productivity, or grow the labor force (demographics). And we’re certainly not going to get much help from demographics. Fortunately, the upside potential for global productivity is growing (or, in economist-speak, productivity’s “right tail is getting fatter” – referring to the rising probability of a positive surprise in the range of outcomes). You might never recognize productivity’s upside potential, however, looking through the lens of macroeconomics alone. So let us look instead to microeconomics (sacré bleu!) for insights. Our thesis in a nutshell: Don’t rule out a global productivity rebound in the coming years that ushers in “old normal” (4%+) global growth. While a strong rebound is not PIMCO’s baseline view, it’s a tail that is fattening – and the microeconomic catalysts may have arrived.