Last week, several stories and reports highlighted weak global productivity growth. On Monday, a Financial Times article titled, “The productivity puzzle that baffles the world’s economies,” observed:
The Conference Board, a research organisation, said last week that labour productivity as measured by output per hour was likely to fall in the US for the first time in more than three decades. America is not alone; across the developed world and, more recently, the emerging markets, productivity has been slowing for a decade or more.
The implications are stark. A weak expansion in productivity will only put more downward pressure on real wage growth, which has already been anaemic in many advanced economies. To the extent that stagnant real wages feed economic populism, it will endanger political stability and a respect for liberal values even in established democracies. It will also threaten the solvency of pension schemes, which rely on future tax revenues and profits.
Yet while most economists concur that slowing productivity is one of the most serious problems in their field today, there is little agreement on the cause and still less on the right response. Only one thing seems obvious: the productivity slowdown has hit such disparate economies that a single global solution is unlikely to have much effect. Policymakers must experiment and be eclectic in their response.
Wednesday’s release of the OECD’s world economic update furthered the discussion. The report noted that weak global demand lowered global investment, which in turn contributed to low productivity. Higher levels of labor slack and declining trade also contributed to the decline. The FT article argued that solutions were country specific while the OECD argued for demand stimulus and market reforms. Regardless, the topic’s inclusion in both publications indicates it is gaining in significance.
Prime Minister Abe’s request to delay the implementation of the latest sales tax hike provided further evidence of Japan’s growing economic malaise. Other weekly releases confirmed the ongoing softness. Industrial production – which has only increased in 3 of the last 12 months -- dropped 3.5% Y/Y. Markit’s PMI hit a 40 month low, with production and new orders decreasing. While unemployment was a very positive 3.2%, this statistics impressive performance hasn’t translated into robust growth in consumer spending. Overall, Japan appears to be slipping back into a muddled economic picture.
In contrast to Japan’s slowly degrading economic environment, it appears the worst may be over for Canada. On Tuesday, Statistics Canada released its 1Q GDP report, which showed a .6% M/M increase. Household spending – which has consistently increased the last 4 quarters -- was up .5%. Residential investment increased a strong 2.7% and exports rose smartly. But business investment declined .4% M/M. On the bright side, this was the smallest decline in 5 quarters. While Canada has emerged from its technical recession at the beginning of 2014, overall growth is still weak.
The upcoming “Brexit” vote is slowing UK economic growth. Markit’s UK manufacturing index rose to a barely positive 50.1. Domestic orders accounted for all new order growth, indicating international accounts may be putting off transactions until after the vote. The construction index declined .8 to 51.2, with all three sectors (residential, commercial and public) slowing. Although still positive, the service sector’s 53.5 reading was one of the weakest of the current expansion. All three surveys contained a question asking respondents about the impact of the upcoming vote. The majority in all three stated the vote had slowed growth largely by increasing uncertainty.
The ECB kept rates on hold at their latest meeting. At the accompanying press conference, ECB head Draghi described the EU economy as growing weakly. Low oil prices and continued employment gains are supporting domestic demand while weaker exports are providing headwinds. Risks are tilted toward the downside. Other EU economic releases were positive. Markit’s PMI was 51.5, although this was the weakest reading in 15 months. Exports were the weakest since January 2015. However, the services index rose .2 to 53.3 and the composite reading was 53.1. Several sentiment indicators were the highest in 4 months while retail sales for the EU28 rose .5%; sales for the EU region proper were flat.
Australian 1Q GDP increased a seasonally adjusted 3.1% Y/Y, but consumer spending, which rose 3.2% Y/Y, was the primary driver. Business investment contracted at a 5.7% Y/Y rate. In other news, retail sales rose a robust 3.2% Y/Y.
Overall, the global picture is still weak. While the EU is growing, it continues its slow pace. And the Brexit vote is clearly providing resistance to and UK growth impulse. Japan continues to slide. One the plus side, Canada is clearly dealing effectively with the oil price shock that hit its economy in the 1H15. And Australia continues to adjust to a new reality where consumer spending trumps capital investmet.