A decade-long decline in global productivity growth came to a halt in 2016, and is projected to show an uptick in 2017, largely driven by faster demand from emerging markets, according to the latest release of annual productivity growth rates for 123 countries by The Conference Board.
The global productivity weakness of the past few years reflects the lingering effects of the global financial crisis and the sluggishness by which new technologies have translated into faster productivity. The 2017 Productivity Brief, based on data from The Conference Board Total Economy Database™, projects global productivity to improve to 1.9 percent in 2017, up from 1.3 percent in both 2016 and 2015.
“In 2016, we did not see a visible turnaround in the dismal productivity performance of the global economy of the past four years,” said Bart van Ark, Global Chief Economist of The Conference Board. “However, the good news is that we are seeing an uptick in productivity growth in 2017, which largely reflects cyclical tailwinds from stronger demand, especially in emerging markets.”
Labor productivity growth — defined as additional output per unit of labor — relates output growth to changes in employment. Most of the recent productivity improvements are driven by faster GDP growth, while the pace of employment growth lags.
- In Europe, faster productivity growth (to 1.1 percent in 2017 – and to 1.0 percent when adjusted for a rise in hours worked) has largely resulted from cyclical improvements in the economy.
- In the United States, productivity growth has been slower than in Europe, while early signs of some recovery (from 0.2 percent in 2016 to 0.8 percent for the aggregate economy in 2017, and even 1.0 percent when adjusted for working hours) mainly reflect already slowing job growth.
- In Japan and the UK, productivity improvements are not accompanied by strong job growth either, as both economies face tightening labor markets in 2017 as well.
In 2016, productivity improved in emerging markets, driven by stronger domestic and global demand and largely unchanged employment growth rates. Much of the improvement came from larger economies, such as China, and from stronger growth in regions such as Latin America and the Middle East that include economies which have relatively high levels of productivity.
Overall, the 2017 projection for productivity in emerging markets is strengthening significantly, though it remains well below its long-term trend.
- Despite weakness in recent years, China’s productivity growth remains solid, perhaps even improving slightly, while employment growth has stalled.
- India is experiencing one of the highest productivity growth rates among the emerging markets, despite a moderate slowdown in 2016.
- Brazil’s productivity growth remained in negative territory in 2016, even though the pullback on input growth, especially employment, softened the productivity decline.
Drivers of Productivity Slowdown
The globally widespread productivity slump has puzzled economists and business leaders alike – even more so in light of rapid technological change and innovation, especially in information and communication technologies over the past few decades. Historically, such large shifts in technology should cause productivity to strengthen.
Several factors play a role in the productivity slowdown. First, the global economic and financial crisis of 2008/09 proved to be a significant barrier to accelerate demand, causing low investment. Monetary easing led to relatively low returns on “real economy” investments, and low interest rates have done little to speed up investment. Low cost of capital may have left less productive firms in business for longer, and may have changed the incentives for businesses to keep cash on the balance sheets and for investors to allocate money to financial instruments and real estate property rather than more productive investments in the economy, which originate from growth opportunities and new innovations.
Ultimately, faster growth and a return to normalized monetary policies may change that dynamic. The good news is that projected global labor productivity growth will improve to 1.9 percent for 2017, including both mature economies (from 0.5 percent in 2016 to 1.0 percent in 2017) and emerging markets (from 2.0 percent in 2016 to 2.7 percent in 2017). This suggests that productivity growth in 2017 will account for almost two thirds of global GDP growth in 2017 compared to about half in 2016.
“This is a good time for companies to benefit from the favorable demand environment to invest (before rates go up further), and accelerate innovation and digital transformation to strengthen the productivity base and prepare for the challenges the global economy still poses in the medium term,” said van Ark.
Global Growth Benefits from Cyclical Strengthening
The Conference Board also published its second quarter update to the Global Economic Outlook. Despite the first quarter slowdown in the U.S., the economic growth trend remains unchanged. In the Euro Area, as political uncertainty lessens, recovery may strengthen. Expected increases in investment could make Europe’s recovery more solid. A cyclical upswing in industrial production and global trade will help emerging economies improve growth from 3.0 percent in 2016 to 3.6 percent in 2017.