In this guest post, Toby Nangle, the Global Co-Head of Multi Asset & Head of Asset Allocation, EMEA at Columbia Threadneedle, wonders whether rising wages caused by changes in demography could ultimately end the productivity slump.
Weak productivity growth has puzzled economists and policymakers but it doesn’t seem to have hurt investors: the period 2009-2016 might even be called “the Goldilocks Slump”. Ample slack in job markets ensured little bargaining power for workers, whilst central banks battled deflationary impulses with a combination of low (or negative) rates and asset purchases. The net effect has been falling real yields and tight risk premiums.
But productivity growth does matter. And we are nearing the point where its absence will be of overwhelming importance to financial market investors. Read more
Maybe you’re aware that productivity growth has been abysmal in recent years.
Maybe you’ve even read Robert Gordon’s new book — or just one of the many summaries and critical reviews — and you worry gravely about what this means for future living standards. Read more
A kindly hat tip to the FT Alphaville reader who directed us to the following speech by the ECB’s Benoît Cœuré from last Friday, and specifically this observation:
If every economy were to react to their domestic challenges by exporting their slack, it would only trigger a race to the bottom.
The UK has outperformed almost every rich country at creating jobs since the crisis, yet has done poorly at boosting living standards. Real take-home pay, while on the rise, is still substantially below the 2007 peak:
Tim Pike, from the Bank of England’s inflation report and agency intelligence division, notes the following about the impact of e-commerce on the consumer sector and labour productivity in a Bank Underground blog post on Wednesday:
The need to stack the shelves of substantially more retail space over the past decade has hit productivity performance. My estimates of labour productivity for the aggregate of Tesco, Sainsbury, WM Morrison, John Lewis Partnership and Marks & Spencer (where output is proxied by turnover deflated by the official retail sales deflator) show that following growth averaging nearly 3% per annum from 2004/05 to 2009/10, labour productivity was broadly static in the next five years. That is partly because multi-channel approaches including e-tailing can reduce labour productivity — especially for the sale of low-value items such as groceries as it is very labour intensive for the retailer to “pick” the goods off the shelf. Official data show that “predominantly food stores” accounted for about 15% of on-line retailing in 2014.
About a month ago, Citi’s Disruptive Innovations report revived the debate over the cause of slowing productivity in Western economies.
One insight related to how modern technology encourages smarter distribution rather than outright production growth. You don’t need to produce as many spoons because, well, in the digital age less is more and everyone drinks Soylent. You probably don’t need a big house either, because, hey virtual reality.
But if true, why does it not feel like quality of life is improving in many corners of the developed world? Perhaps there is something more to it. Read more
British real economic output is only about 3 per cent higher than at the beginning of 2008. Yet labour input (hours worked adjusted for schooling and experience) is up around 11 per cent and the real value of the UK’s net capital stock has grown about 6 per cent.
The implication, as it can’t be measured directly, is underlying productivity has plunged in the last seven years. One of the most important concepts in macroeconomics, the decline matters for living standards and anyone hoping to improve them, yet explaining the UK experience remains a puzzle without a solution. Read more
There’s always a danger, when you question official statistics, that you come off sounding like a nutter.
But some forms of scepticism are more respectable than others. At one end of the spectrum, we’ve previously indulged the possibility that seasonal adjustment algorithms inadvertently distorted the GDP and employment figures. At the other, you have people who add fixed constants to the reported growth rate of consumer prices because they disagree with methodological changes from the 1980s and 1990s, but speak as if they are uncovering a conspiracy. Read more
Productivity growth in the rich world started slowing down around the same time that the financial sector’s share of economic activity started rising rapidly. A new paper from the Bank for International Settlements suggests a causal connection.
First, the high salaries commanded in the financial sector — much of which can be attributed to too-big-to-fail subsidies and other forms of rent extraction — make it harder for genuinely innovative firms to hire researchers and invest in new technologies. Read more
For the nearly half-century through 2012, annual labour productivity growth in the US construction sector averaged close to zero, and it has been negative for the past two decades.
Here’s a graph constructed last year by Paul Teicholz, a civil engineer who has been working on construction technology issues for a long time and who produced the best concise analysis of the sector’s productivity that I’ve come across: Read more
Pop quiz – what was the price earnings ratio for the UK benchmark at its previous peak of 6,722 in October 2007?
We ask because the FTSE 100, now slightly higher, is near as dammit at the same valuation once again. But the real surprise is perhaps the lowly level of that ratio. Read more
The chart comes via Michael Mandel’s new paper.
As always with productivity growth numbers, the usual caveats about residual measures apply. That goes double for multifactor productivity growth, aka total factor productivity growth, which is a residual of a residual. Read more
As Mark Carney outlined at Wednesday’s press conference for the BoE inflation report, much-awaited ‘forward guidance’ will be linked to unemployment falling through the 7 per cent level. But it will also in some sense be related to the committee’s evaluation of how much slack there is in the economy.
Or rather, they’re linking rates to unemployment (targeting, in everyone else’s book) because they can’t explicitly target slack. Read more
US industrial production has grown at least twice as fast as GDP since the start of the recovery.
“Onshoring” work because wage differentials are narrowing plus falling electricity prices because of shale gas = more growth, so… great! Maybe? Read more
Hugh Small is an independent economic analyst and management consultant, who was formerly with US-based firms Arthur D. Little and A. T. Kearney. He blogs at mature economy.org, and has a running thesis that mature economies must be assessed differently to developing economies because they share very different strategic goals.
Furthermore, once you factor in the subtle differences that apply to developed economies, things like the UK productivity puzzle begin to look a little less mysterious. Read more
The preliminary UK GDP estimate for the fourth quarter is out and it looks like there’s been a return to err.. contraction.
Via the ONS:
GDP was estimated to have decreased by 0.3% in Q4 2012 compared with Q3 2012. Output of the production industries was estimated to have decreased by 1.8% in Q4 2012 compared with Q3 2012, following an increase of 0.7% between Q2 2012 and Q3 2012.
Some might say it’s labour hoarding; some might say it’s “flexibility”; some might say it’s the gutting of the City. Many would think the UK productivity puzzle goes on, and some would just ponder the strong showing of full-time jobs in the latest figures.
Here’s the view from Nomura’s Philip Rush, with some charts (click to enlarge)… Read more
Let’s look at the latest from the UK’s Office for Budget Responsibility (our emphasis):
The combination of more robust employment and much weaker GDP growth than we expected together create a significant ‘productivity puzzle’. Output per hour is much weaker than in previous cycles and than in our June 2010 forecast. Several explanations for the puzzle have been put forward and although we believe that some of the weakness of productivity relative to the pre-crisis trend is likely to be a temporary phenomenon, we also assume that a significant proportion of the hit is likely to be permanent or long-lasting. Read more
If you’re seeking a counter view to the one expressed on Thursday by a Bear in a Bath, look no further than the latest note from Stephen King’s team at HSBC.
Some great stuff from the global head of economics today, including thoughts about the UK’s productivity puzzle, the US jobless recovery, the pointlessness of QE and whether a structural shift may under way. Read more
The minutes to the Bank of England’s September meeting are out, and we can’t help being drawn to the following comments about the UK’s labour productivity puzzle (our emphasis):
The labour market had remained surprisingly resilient in the face of the contraction in activity. The unemployment rate had fallen to 8% in the second quarter, its lowest level for around a year, and employment was estimated to have risen by more than 200,000, with a rise in permanent employees accounting for more than half the increase. Read more
Something of a puzzle is emerging in the UK’s labour market.
The overall employment picture is definitely improving. According to the latest figures from the Office of National Statistics, the economy added more than 431,000 new jobs in the past year and the employment rate is now considered to be relatively high. At the same time, however, there’s no doubt that labour productivity has been falling — quite the opposite to the picture in the US, where productivity has been rising sharply. Read more
Anyone who has watched the 2011 Adam Curtis documentary series “All watched over by machines of loving grace” will remember the bit about Alan Greenspan becoming confused about America’s exceptional growth in the 1990s.
At the time, the data didn’t seem to fit the prevailing reality. The incredible and seemingly unstoppable growth Greenspan was seeing on the ground was at odds with his economic models, which instead were signalling an imminent rebalancing on the back of wage pressures and implied inflation. Read more
We noted in an earlier post that an optimistic near-term scenario for US employment would likely mean productivity growth remaining at its depressed rate for a little while.
The alternative — productivity growth returning back up to pre-crisis trend — would have to coincide with sluggish employment growth unless economic growth were to pick up significantly. Read more
As you’ll find in an economics textbook, labour productivity growth is driven by some combination of:
1) improvements in human capital, such as a more-educated or more-experienced workforce, Read more