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The productivity remedy

Pictet Wealth Management CIO Office & Macro Research
Pictet Wealth Management CIO Office & Macro Research • 3 min read
The productivity remedy
Photo: Carl Heyerdahl via Unsplash
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Productivity gains could mitigate the impact of deglobalisation and structural inflation over the next decade. Growth and inflation over the next 10 years will be significantly influenced by productivity growth, a crucial driver of long-term economic performance.

The ideal scenario would be a structural increase in productivity fuelled by public and private investment in strategic and innovative industries, including those playing a pivotal role in the transition to net-zero carbon emissions. Recent developments in AI and the pandemic-led transformation of work-from-home industries have likewise raised hopes of a fresh productivity boom.

We have long believed that technological innovation will eventually boost productivity in the sectors that successfully integrate new technologies in areas such as AI, quantum computing, biotech and robotisation. All of these have the potential to revolutionise the way businesses operate.

One of the challenges in analysing productivity is measuring it. According to economist Robert Gordon, deviations in productivity growth from its long-run trend (the so-called ‘gap changes’ in output) are not solely due to external productivity ‘shocks’ but are largely endogenous and strongly procyclical.

In his July 2022 working paper, Gordon posits that recent productivity growth can be largely attributed to changes in the performance of work-from-home service industries since the pandemic.

Productivity in goods industries experienced a boom and subsequent slump, whereas contact service productivity declined throughout 2020 and 2022. The pandemic jolts coincided with a 20-year decline in productivity growth. In the late 1990s and early 2000s, US productivity grew over 3% annually, which dropped to around 1.5% before the pandemic, even lower in other developed economies.

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Intangibles such as research, development, and software greatly boost productivity. Economist Janice Eberly’s October 2022 paper shows that increased investment in intangibles like big data, software, and patents is linked to productivity growth. This effect holds true even in countries with reduced investment in physical capital.

In our secular outlook, we project that structural shifts such as the energy transition and (partial) deglobalisation may initially depress productivity growth. However, a new investment cycle focusing on intangibles will likely lift productivity gains over time.

Higher productivity could boost potential growth and employment, helping to mitigate the impact of the relatively high real interest rates we expect over the next decade due to deglobalisation, structurally higher inflation and a legacy debt overhang.

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Productivity growth can be considered the best remedy against inflation in the long run. It would also help deal with labour shortages in ageing societies. Lastly, productivity growth is the only way to increase living standards and reduce inequality over the long run.

For all these reasons, it is of the utmost importance that governments and businesses focus on fostering innovation and investing in sectors with the greatest potential for productivity enhancement, with AI an important driver.

Growth and inflation trends hinge on productivity growth, which depends on strategic investments and innovation cycles. Governments and private institutions can help secure a more stable and prosperous future for all by prioritising industries and technologies that contribute to a net-zero economy.

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