Business,Media,News The Global Economy Shows a Decline in Productivity

The Global Economy Shows a Decline in Productivity

In a newly released and very significant report by the Conference Board, it is clear there is a disturbing trend going on in the global economy.

Global productivity growth has remained weak in 2018 and will continue to be slow through 2019, according to the latest release of annual productivity growth rates for 123 countries by The Conference Board, the global business research organization.

Globally, growth in output per worker was 1.9 percent in 2018, compared to 2 percent in 2017 and projected to return to 2 percent growth in 2019. The latest estimates extend the downward trend in global labor productivity growth from an average annual rate of 2.9 percent between 2000-2007 to 2.3 percent between 2010-2017.

“These latest numbers dash our hopes that at least some of the productivity recovery since 2016 could be sustained and further strengthened in 2018 and 2019,” said Bart van Ark, Global Chief Economist of The Conference Board. “The long-awaited productivity effects from digital transformation are still too small to see reflected in a lasting improvement at the macroeconomic level. A productivity recovery is much needed to prevent the economy from slipping towards a substantially slower growth than what has been experienced in recent years.”

The 2019 Productivity Brief is based on data from The Conference Board Total Economy Database, which are comprised of measures of labor productivity (including output per worker or per worker-hour) and total factor productivity growth (which takes account of investment in capital and labor force skills). The latter measure, which provides a more accurate picture of the overall efficiency by which capital, labor, and skills are combined in the production process, turned negative again at -0.1 percent in 2018, down from a small increase of 0.2 percent in 2017.

“The widespread weakening in total factor productivity growth over the past decade, which was continued in 2018, is of great concern from a medium-term growth perspective,” said Klaas de Vries, Associate Economist at The Conference Board. “It means that the modest growth in labor productivity that still is being realized is mostly driven by the accumulation of physical capital, rather than efficiency gains or innovations. Given their strong human capital base and well-developed innovation economy system, mature economies including the US, Europe and Japan show some of the best prospects to turn investment into better productivity performance.”

Among mature economies, the productivity slowdown has bottomed out in recent years, but with no clear signs of a revival. Emerging markets still have a substantial productivity growth advantage over mature economies. However, overall productivity growth rates in emerging markets have also slowed since 2010, and this downward trajectory will continue for the time being.

Mature Economies
Among mature economies, the productivity slowdown in the past decade has been dramatic, as labor productivity growth rates halved from an average annual rate of 2.3 percent in the period 2000-2007 to 1.2 percent from 2010-2017. Productivity growth further slowed to 0.8 percent in 2018, showing a small projected improvement to 1.1 percent in 2019. When taking a longer-term perspective, the decline in productivity growth rates in mature economies seems to have bottomed out in recent years.

  • The United States experienced a stabilization of growth in output per hour at 0.9 percent in 2018 compared to 1 percent in 2017. Growth in output per hour slowed from 2.6 percent between 2000-2007 to 1 percent between 2010-2017. Meanwhile, growth in total hours worked improved from only half of a percent to 1.4 percent between the two periods, and to 2.1 percent in 2018. The “jobless productivity” phase of the early 2000s has clearly turned into a “productivity stagnation” phase since the Great Recession. Still, US labor productivity growth is slightly ahead of that in most other mature economies. This contrasts with total factor productivity which declined slightly faster than the average for mature economies, pointing at a higher impact of investment relative to efficiency and innovation.
  • In 2018, Europe experienced an exceptionally weak year in terms of productivity growth, driven by a cyclical downturn in output growth since the second half of the year. Growth in output per hour in 2018 for the Euro Area was 0.2 percent, well below the 2010-2017 average of 1 percent, driven mostly by a slowdown in output growth while total hours worked continued to increase. Total factor productivity in the Euro Area turned negative in 2018 at -0.1 percent. Among large Euro Area economies, Spain and Italy saw a decline in productivity growth in 2018, while it stalled in Germany and modestly increased in France. The stagnation in productivity growth in Germany was likely in part related to its exposure to weakening trade growth with China. The average labor productivity level in Germany was only 4 percent below that of the United States in 2018. For France, it was 5 percent below the US level, while Italy and Spain showed productivity gaps about 25 percent relative to the U.S.
  • Productivity growth (output per hour) in the United Kingdom has been on a slowing growth path over the past three years, from 0.8 percent in 2017, to 0.5 percent in 2018 and projected at 0.2 percent in 2019. Nowhere among large mature economies was the drop in productivity growth rates between 2000-2007 and 2010-2017 bigger than in the UK, namely from 2.2 percent to 0.5 percent respectively. Total factor productivity also saw a rapid decline from 0.5 percent on average between 2000-2007 to -0.1 percent from 2010-2017 (as well as in 2018). While strong employment performance was in part offsetting the UK’s productivity growth between 2010-2017, the growth rate of hours worked has rapidly declined recently. The level of labor productivity in the United Kingdom remains relatively low compared to the United States (76 percent of the US level in 2018) or even Germany and France (96 and 94 percent of the US level in 2018 respectively).
  • A positive exception to the slowing trend in productivity growth among mature economies can be found in Central and Eastern Europe. In particular Poland, Slovak Republic and Hungary saw improvements in output per hour growth in in 2018, thereby staying on a trajectory of faster than average European productivity growth. Especially, total factor productivity growth remains strong in this region, possibly pointing towards increased spillover effects from their integration with western European economies as well as wage cost pressures providing incentives for business to raise productivity faster.
  • Japan is facing both a strong labor market and weak output growth. Growth in output per hour worked has averaged 1 percent annually in recent years, which is weak by historical standards. Total factor productivity declined strongly at -1.4 percent in 2018. Due to the volatility of the Japanese productivity data, year-over-year comparisons are not very meaningful. The 2019 projected improvement in output per hour by 1.3 percent should be interpreted as a ‘technical’ bounce back from the 2018 decline at -0.6 percent, rather than a signal of structural improvement. Japan’s level of labor productivity is only 64 percent of the level in the United States, in particular, because of low productivity in agriculture and services.
  • Among other mature economies, Southeast Asian economies such as Singapore, South Korea and Taiwan are showing strong output per hour worked growth rates. Other economies, including Australia, Canada, and New Zealand show greater weakness. However, all countries in the Mature Economics group perform below their historical averages, especially with regard to total factor productivity.

Emerging Markets
Emerging markets have lost much of their productivity catch-up potential in the past decade. For the largest eight emerging markets (Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey) combined, output per worker growth slowed from 5.5 percent between 2000-2007 to 4.4 percent between 2010-2017, a trend which has been exacerbated recently to only 3.5 percent. However, emerging markets still have a significant productivity growth advantage over mature economies at 3.4 percent for the largest eight emerging markets in 2018, compared to 1 percent on a person employed basis for the mature economies.

  • The drop in the growth rate of output per worker in China has been among the largest, coming down from 8.9 percent between 2000-2007, to 6.1 percent between 2010-2017, and only just over 4 percent now – even though those productivity rates are still triple or more those of mature economies. As the population ages, employment growth contracted in 2018 for the first time in over five decades and is expected to contract further this year. China’s comparative level of labor productivity (output per worker) is only 22 percent of the level in the United States.
  • Among the world’s largest emerging economies, India continues to boast the highest labor productivity growth rate at an average rate of 5.8 percent in terms of output per worker between 2010-2017, and even 5.9 percent in 2018 with a modest projected slowdown to 5.2 percent in 2019. Total factor productivity growth in India is also among the highest for emerging economies by on average 2 percent. However, the level of output per worker in India is still relatively low compared to the United States (15 percent) as well as relative to other emerging markets.
  • Other developing Asian economies continue to show rapid increases in productivity. Especially large economies such as Indonesia and the Philippines keep performing close to their average growth rate of output per worker over the past two decades of 3 to 4 percent per year on average. At relatively low productivity levels of 22 percent (Indonesia) and 18 percent (Philippines) of the US level, those and many other Southeast Asian developing economies still have a large remaining catch up potential for productivity growth.
  • Average productivity growth (output per worker) in Latin America stayed below zero for the second consecutive year in 2018, showing that the region continues to struggle with the legacy of decades of weak output per worker growth rates. Brazil and Mexico continue to struggle after decades of weak output per worker growth rates. Productivity growth is estimated to have contracted in 2018 in both countries at -0.3 percent in Brazil and -0.6 in Mexico, even though this is in part explained by strong recoveries in employment growth in both countries. However, the productivity bounce backs in 2019 are still quite modest. The comparative levels of labor productivity (output per worker) in Brazil and Mexico are at 25 percent and 36 percent of the US level respectively. With other large economies in the region such as Argentina and Venezuela mired in recession, the short-term productivity outlook remains weak, even more so when considering total factor productivity growth, which has been in negative territory in almost all Latin American countries.
  • Output per worker growth rates in the oil and natural gas producing economies of the Gulf Region remain relatively low, even though higher oil prices for most of 2018 provided some temporary relief. However, the Gulf Region economies struggle with large challenges arising from the need to diversify their economies which seem to have at least a short-term downward effect on productivity growth. Output per worker in Saudi Arabia contracted at -1.1 percent in 2018 although less than in 2017 (-6.2 percent), but the outlook for 2019 still shows no improvement in the country’s productivity performance.
  • Productivity growth in Sub-Saharan Africa picked up in recent years and output per worker increased at 1.5 percent on average in 2018. However, this rate of growth is down from the annual average of 2 percent for 2010-2017 and significantly below the 3 percent growth rate during the 2000-2007 period. As the average level of output per worker in Sub-Saharan Africa is only 8 percent of that in the United States, the region is currently hardly realizing any catch-up effects relative to more advanced economies. South Africa, which is the richest country in the region at 36 percent of the US level of productivity, has shown two consecutive years of contraction in output per worker (-1 percent in 2017 and -0.6 percent in 2018) and is projected for another year of -1.1 contraction in productivity in 2019.
  • Russia, Central Asia and Southeast European countries witnessed a stabilization in productivity growth rates on average for the region at around 2 percent in recent years. Turkey showed a significant weakening in output per worker growth in 2018 to just 0.7 percent compared to an average of 2.7 percent from 2010-2017 and 3.7 percent in 2017. For 2019, output per worker in Turkey is projected to fall at 1.8 percent as the country has entered a recession.

Detailed tables are available here: Total Economy Database Summary Tables.

Leave a Reply

Your email address will not be published. Required fields are marked *