- In our May Secular Forum, we highlighted the rising potential for an innovation-driven productivity rebound in the coming years after a decade-long slump ‒ driven by a host of new technologies spreading throughout the global economy.
- In the post-crisis years, strong macro headwinds have stood in the way: excess capacity and large output gaps; high economic and policy uncertainty; weak capital investment; a worsening misallocation of capital across firms; and lingering credit market strains and corporate-sector financial vulnerabilities.
- What lies ahead? We see increasing potential for several key macro headwinds to fade. Although it is too soon to declare victory, recent macro trends are encouraging. But a productivity upswing, if it were to materialize, could prove disruptive to the markets.
In our latest Secular Outlook, we highlighted the rising potential for an innovation-driven productivity rebound in the coming years. We think productivity, after a decade-long slump, may be driven higher by a host of new technologies spreading throughout the economy. However, for microeconomic advances to unleash a productivity rebound economywide, the macroeconomics must cooperate: It takes two to tango. In recent years, several key macro headwinds – mostly demand-side factors and hangover effects from the 2008−2009 global financial crisis – have stood in the way. This may be about to change.
SLUMPING PRODUCTIVITY – WHY EVERYWHERE AT ONCE?
Like innovation, productivity booms have come in fits and starts. It has been considered normal for productivity, or output per hour worked, to jump in some geographies and industries while simultaneously slumping in others. So it is revealing that the ongoing global productivity slump has been abrupt, deep and highly synchronous across countries and sectors. As shown in Figure 1, productivity growth has converged across countries in recent years more than at any other time in the postwar period.
Divergences in productivity trends across countries used to be far wider, even during prior slumps. From an industry-level perspective, consider that in the post-crisis period, less than 5% of all sectors (by number) have enjoyed accelerating productivity growth relative to their long-term trend, versus half of all sectors in the years leading up to the crisis.
In a normal economic environment, productivity does not slump everywhere all at once. So what is going on?
MACRO FACTORS HOLDING PRODUCTIVITY BACK
Several macro factors – mostly on the demand side, including hangover effects from the crisis and the deep recession that followed it – may be to blame for the uncanny synchronicity in the latest productivity downturn. The crisis significantly depressed global aggregate demand, producing excess capacity (idle resources) and large output gaps (below-potential GDP growth) that have taken years to work through. And in the recovery period, companies steadily hired back the unemployed after deep layoffs during the crisis. The result has been consistently slow economic growth combined with accelerating growth in total hours worked – a sure recipe for a productivity slump.
Note, however, that during prior episodes of deep recession in developed economies, there were large declines in total factor productivity (TFP) even after adjusting for resource underutilization. Might there be more to the productivity downturn this time as well?
Weak capital investment
It is no secret that in the post-crisis years business investment has been weak. Most developed economies have had to work off high unemployment and labor market slack; the result, slow wage growth, has reduced the incentive for firms to substitute (productivity-enhancing) capital for labor.