Investment officeJune 28 2019

Thematic Thinking – Productivity Overview

4 mins read

Since the global financial crisis (GFC), productivity levels across the world have stagnated even despite advances within technology; the UK in particular has witnessed dramatic declines in productivity since the GFC and there are no indicators that this is coming to an end. This slowdown in this progress will have implications on global poverty levels, as productivity gains in past decades made a considerable dint in these (JP Morgan), global economic growth as well as posing a significant problem for developed economies, which face shrinking labour pools due to ageing populations (Standard Chartered). Weak productivity further poses a significant threat to governments as it usually implies stagnating living standards and can result in rising income inequality, socio-economic and political issues (Standard Chartered). This is turn could potentially link to an increase in populism and threaten established parties dominance of the political arena.


There are multiple theories as to why productivity levels have slumped despite aggressive technology growth:

  1. The Pessimistic Outlook

Some believe new inventions have not and will not have the same impact as previous ones like electricity and the steam-engine; they argue subdued productivity growth is down to the fact that new inventions are not as transformative as previous ones and the digital tech age pales in comparison (Standard Chartered, Blackrock). However, this is not supported by historical trends as even after the introduction of electricity, there was a lag in productivity thus suggesting the speed of diffusion of new technologies before they become widespread has an impact on productivity growth.

  1. The Alternative View

After past waves of industrial advancement, there have been lags in productivity and optimists believe an upwards trend in productivity growth could be coming soon and present sluggish growth is nothing unique (Standard Chartered).

It is likely that productivity discussions are inaccurately focused on the manufacturing sector and should be refocused on the services sector, which now accounts for almost 70% of the global economy as digital technologies are making this industry more competitive, productive and tradable (Standard Chartered). Thus, digital technologies are transformative, dismissing the pessimists and so, other factors must be at play in generating weak productivity growth.

Suggested Factors behind the Productivity Slump:

Declines in productivity has stumped economists especially in light of the tech boom we are currently experiencing as large shifts within technology should lead to stronger productivity growth (Standard Chartered). JP Morgan hypothesises the factor mostly responsible for slower productivity rates (within the US) is the slump in investment spending following the end of the tech boom, which Standard Chartered underlines as well. So if investment spending remains low, it is likely so will productivity growth. The same forces restricting US growth appear to be operating on a global scale and could be behind slowdowns in UK growth as well (JP Morgan).

They further note that the slowdown could reflect the slowing pace of technology, which can enhance productivity, spreading from leader firms; decreases in trade, which is how new technologies are spread, also has contributed to this reduction in productivity and Standard Chartered too notes that poor diffusion of new technologies to emerging markets has made a significant contribution to poor global productivity growth.

JP Morgan further alludes to other factors which could be adversely impacting productivity levels such as the slowing rate of improvement in skills and the ageing of the workforce as well as the slowing rate of higher education levels. On average workers had 6.1 years of education in 1950 but by 2010 they had an average of 11.5; whilst this is a big increase, the rate at which these gains are being achieved is slowing meaning the rate workers increase in productivity through education is as well (JP Morgan).

Standard Chartered has mapped the downfall in global productivity and reinforced that weak investment in developed markets, alongside poor technology diffusion in emerging ones has led to weak global productivity levels. However they additionally reference several other headwinds which have also slowed growth, both cyclical and structural in developed economies:

Cyclical drivers include: falling wages and low capacity utilisation as these discourage labour saving innovation, weak bank lending, fiscal tightening and accommodative monetary policy has led to low returns on investments and low interest rates haven’t done much to accelerate investment (Standard Chartered).

Structural forces driving productivity downwards include the growing dominance of the service sector, which JP Morgan notes as well, as there is a bigger chance for error in measuring productivity within this sector- how can you tell if one doctor is more productive than another? and also possibly because of the fact that it is harder to automate production in services than in areas like manufacturing.

Potential of Automation:

The automation of some of a worker’s tasks can boost productivity levels both at an individual level as well as at a macroeconomic level where growth is critical. McKinsey estimates automation could boost productivity globally by 0.8% to 1.4% annually. Thus, governments should embrace automation and new technologies like artificial intelligence and robotics within their economies and should instigate investment and market incentives to encourage progress in this area. However, whilst automation is likely to ease productivity slumps, it cannot reverse them alone and will not be enough to achieve long term growth aspirations and so additional measures will be needed, such as reworking business processes (McKinsey).


The main factors highlighted as causing declines in productivity are weak investment spending in developed markets and poor technology diffusion in emerging ones. Other factors could also be at play, both cyclical and structural and in order to ease the burden posed by low productivity, alongside other measures, new advances in robotics and artificial intelligence should be embraced and established within the labour force in order to avoid the problems low productivity generates.


Blackrock: ‘Productivity Slowdown Puzzle: Structural, Cyclical or Erroneous?, 2016

Deloitte: ‘2018 Investment Management Outlook’, 2018

JP Morgan: ‘The Global Productivity Slump: Causes and Outlook’, 2017

McKinsey Global Institute: ‘A Future that Works: Automation, Employment and Productivity’, 2017

Standard Chartered: ‘Productivity Slowdown: Is this Time Different’, 2017

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