US labour productivity figures released last week showed that labour productivity growth reached its highest level in eight years in the four quarters to 2019 Q1. A key question for investors and policymakers is whether this is part of a cyclical upturn, or whether productivity is slowly returning to more normal rates of growth.
The pace of US economic growth has struggled to return to the kinds of rates regularly seen before the Global Financial Crisis. This phenomenon is not restricted to the US — it has been an issue in many advanced economies. There are two broad reasons for it: the growth rate of the working age population has slowed relative to the pre-crisis period; and labour market productivity growth is lower too. Demographics and the retiring of many baby boomers mean that the working age population is expected to grow slowly for many years ahead, dampening trend growth. The outlook for productivity growth is not much better in our view.
We have long argued that ultra-loose monetary policy has contributed to the slowdown in productivity growth by blunting the forces of creative destruction. A growing body of literature now supports this view. The US is one of the few advanced economies that has raised interest rates since 2008 — a step in the right direction. And US tax reforms, by encouraging business investment, are likely to boost productivity a little too.
But with the Fed now on hold, little sign of inflation picking up, and the natural rate of interest seemingly low, the prospect of interest rates and productivity growth returning to their pre-crisis averages seems remote. There is typically a cyclical component to productivity growth: the fear is that the upturn over the past year or so may be little more than that.
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