A productivity crisis is stalking the global economy with most countries failing last year to improve their overall efficiency for the first time in decades

Last updated: January 14, 2014 6:02 pm

Productivity crisis haunts global economy

By Chris Giles in London

A productivity crisis is stalking the global economy with most countries failing last year to improve their overall efficiency for the first time in decades.In a sign that innovation might be stalling in the face of weak demand, the Conference Board, a think-tank, said a “dramatic” result of the 2013 figures was a decline in the world’s ability to turn labour and capital resources into goods and services.

Productivity growth is the most important ingredient for raising prosperity in rich and poor countries alike. If overall productivity growth disappears in the years ahead, it will dash hopes that rich countries can improve their population’s living standards and that emerging economies can catch up with the advanced world.

The Conference Board said: “This stalling appears to be the result of slowing demand in recent years, which caused a drop in productive use of resources that is possibly related to a combination of market rigidities and stagnating innovation.”

The failure of overall efficiency – known to economists as total factor productivity – to grow in 2013 results from slower economic growth in emerging economies alongside continued rapid increases in capital used and labour inputs. Labour productivity growth also slowed for the third consecutive year.

The decline in total factor productivity continues a trend of recent years in which the remarkable rise in the efficiency of emerging markets has slowed and in advanced economies it has declined.

While the measures relate to whole economies, companies at the sharp end of the productivity slowdown have redoubled efforts to improve the situation. The world’s biggest miners, including BHP Billiton and Rio Tinto for example, are among thosetrying to reverse a worrying decline in productivity

by moving away from expensive investment in new projects to maximising returns from existing operations.

Bart van Ark, chief economist of the Conference Board, said it was not clear whether the decline in productivity growth was the result of weak demand reducing the output of economies, or that the remarkable consumer innovations are not actually improving the efficiency of economic activity.

The first idea relates to the “secular stagnation” school of thinking made prominent last year by Lawrence Summers, the former US treasury secretary, while concerns about the usefulness of modern technology in improving productive efficiency have been raised by Prof Robert Gordon, of Northwestern University.

“It is probably a bit of both,” said Mr van Ark, adding, “the truth is somewhere in the middle.”

The Conference Board’s annual analysis of productivity uses the latest data to estimate economic growth in all countries, the increase in hours worked and the deployment of additional capital to estimate the efficiency of individual economies.

Globally, it found that labour productivity growth declined from 1.8 per cent in 2012 to 1.7 per cent in 2013, having been as high as 3.9 per cent in 2010. Total factor productivity dipped 0.1 per cent.

For the US it found that productivity gains of the early years of the crisis continued to be elusive in 2013, with labour productivity growth stable at 0.9 per cent in 2013.

The US trends were, however, better than those in Europe, which has seen extremely weak productivity growth alongside relatively muted unemployment in most large economies with the exception of Spain, where joblessness soared. Labour productivity grew 0.4 per cent in 2013, having fallen 0.1 per cent in 2012.

Mr van Ark said Europe’s problem in achieving more efficiency from its labour force stemmed from structural rigidities. “We really see the need for more people to move quickly from one company to another and where [innovative] firms do not see huge risks in taking on these people.”

Emerging economies saw rates of growth of productivity fall from extraordinarily rapid rates, even though the rate of growth at 3.3 per cent was still much higher than in advanced economies.

For China, the Conference Board said that, while “the statistical information for the latest years is sketchy, the indications are that sustained investment growth in China has not been accompanied by the efficiency gains (measured by total factor productivity growth) similar to those of the previous decade”.

Mr van Ark said he expected productivity growth to pick up in 2014 as demand conditions improved, leading to faster growth of outputs than inputs, but the relatively weak productivity growth outlook to persist.