Global productivity – GDP per hour worked – has been in a slump for years. The big question is, what lies ahead?
In looking at productivity, economists often focus on the top-down, macro perspective. However, when we look at the state of industry in 2017 from the bottom up, we see a global economy with underappreciated potential. The gap between productivity leaders and laggards has widened dramatically in recent years, and this divergence represents significant pent-up productivity gains.
Can these potential gains be unlocked? We look to microeconomics for catalysts. The collective impact of cutting-edge technologies – robotics, simulation, the cloud, 3-D printing, augmented reality, big data and microsensors – may be pushing productivity to a tipping point.
Consider these developments:
- Rising synergies. Today’s leading technologies have graduated from “fad” status and are being used more and more in concert with each other to radically change the way firms operate.
- Falling costs. Productivity-enhancing technologies exist today that haven’t yet been put to use because their costs outweigh their benefits. That’s changing as we write; advanced robotics, for example, has reached an inflection point.
- Greater small-firm adoption. Large, global “frontier” firms have enjoyed solid productivity growth in recent years; most others have stagnated, as today’s best technologies have been too complex and costly for all but the most sophisticated. That’s also quickly changing. Broader adoption will help smaller and less sophisticated firms close the gap to the productivity frontier. Creative destruction may accelerate.
- Green shoots in services. In services industries – notorious for slow productivity growth – efficiency gains through basic information technology (IT) may still be in their infancy. IT solutions that manufacturers adopted long ago are boosting competition in services at an accelerating rate.
These catalysts may put low- to mid-single-digit global productivity growth within reach across many industries in the coming years. Extrapolate from individual sectors to the global economy as a whole, and suddenly global productivity growth of around 4% seems realistic. And that 4% includes zero credit for potential unknowable future innovations.
The macro contribution
There may also be a nascent macro catalyst at play. Global central banks are beginning to rein in extraordinary post-financial-crisis monetary stimulus, which has affected the allocation of capital worldwide for years. The withdrawal of ultra-accommodative monetary policy may encourage a more efficient capital allocation throughout the global economy, potentially helping jumpstart creative destruction – which is key to shrinking today’s massive productivity gaps.
Bottom line: We’d put better-than-coin-flip odds on a global productivity rebound in the coming years. What might it look like? We offer two scenarios as food for thought: In the first, “Technological Unemployment,” new business practices displace labor (we humans are relegated to the beach while machines do most of the work). In the second, “Productivity Virtuous Circle,” innovation kills low-skill jobs but simultaneously creates high-skill jobs that don’t currently exist. These scenarios are very different in certain respects (notably regarding their social consequences) but share the key similarity that productivity stages a comeback.
Investment implications of higher productivity growth
What could a rebound mean for investors? For starters, it could mean higher interest rates and steeper yield curves – greener pastures, indeed, for savers, pension funds and financial institutions.
It could also mean greater potential for equity returns in the future. And it could boost the resilience of the global economy in the face of several looming secular risks.
After the long slump, productivity’s right tail – the chance of a better-than-expected outcome – appears to be getting fatter. As the saying goes, it is always darkest just before the dawn.
For a more in-depth look, please see “Productivity: A Surprise Upside Risk to the Global Economy?”
Matthew Tracey is an account manager at PIMCO. Joachim Fels is PIMCO’s global economic advisor and a regular contributor to the blog.