Poor productivity growth

The team at Pyrford investigate the disappointing levels of productivity growth around the world.
July 2019

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Risk disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Productivity growth throughout the world continues to disappoint. The chart below compares the experience since 2014 with various prior periods. In every case it is significantly inferior to the “glory years” of 1995-2005 – and this is despite the trillions of dollars thrown at the world economy by central banks since 2009 and the record low level of interest rates. Clearly something is not right. If productivity growth in most advanced economies continues at an annual rate averaging around 0.5%, the overall level of real output growth (GDP) will struggle to average more than 1% on an annual basis.
Italian productivity growth is particularly disappointing. Even between 1995 and 2000 it averaged only 1%. Between 2005 and 2010 it was negative and since 2014 has settled at zero. Little wonder that Italian politics is in turmoil (although, to be fair, that applies to most countries) and there remain serious initiatives to emulate the UK and extract the country from the European Union (and thence the eurozone).

Risk disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Graph showing productivity growth in selected advanced economies since 1995

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Growth in productivity requires steady growth in efficiently employed capital investment – something that has been in short supply since the financial crisis. Cheap and plentiful money hasn’t worked. Confidence to make long-term investment decisions is absent. Setting an official interest rate at zero – or even less – hardly sends a positive and confident message to the key decision-makers in the private sector. What these low or non-existent interest rates have done is entrench vast numbers of “zombie firms” – diverting vital resources from more efficient companies. The Bank for International Settlements has calculated that zombie firms make up 12% of listed companies in the advanced economies – a staggering figure and an indictment of the economic policies that have brought it about. Ultimately the system only works at close to its efficient best if capital is effectively allocated. We are clearly a long way from that ideal.
Poor productivity growth leads to poor (or no) real wage growth and social unrest. The chart below looks at real compensation per hour since 2010 in a range of countries.
Graph showing growth in real average compensation per hour (employees)
The dismal performance of Greece, Spain, Portugal, Ireland and Italy is no surprise. All boosted wages to uncompetitive levels prior to the financial crisis whilst bathed in the warm glow of the early years of the eurozone, but they are now paying the price. The UK has also been dismal, although there have been some signs of life in real wages in recent times. Australia is suffering from the end of the China-induced mining boom and the associated collapse in capital investment. Japan has had poor productivity growth for years and our research indicates real wages have been declining since the mid-1990s.
The Central and Eastern European countries with relatively attractive rates of productivity growth are playing catch-up. The OECD recently commented: “…countries that have been able to increase their export-to-GDP ratio over time have also improved their labour productivity over the same period…participation in global value chains (GVCs) has contributed to the catch-up process.”
The OECD made an interesting comment in relation to the US, Canada and the UK: “…the decline [in productivity growth] since the end of the 1990s marked a reversal of growth that coincided with the IT revolution.”
In our judgement there is no near-term catalyst likely to encourage long-term capital investment and thence an improvement in productivity growth. The world appears locked into low or negative interest rates and probably further bouts of quantitative easing. It may stimulate financial assets but do little for the so-called real economy. This leads to ever-growing levels of wealth inequality – and even more social unrest.

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