Productivity in G7 & Western Europe

Despite productivity gains [measured as Real Output (GDP) per Employee] with the onset of the 2008 financial crisis – thanks to soaring unemployment in the G-7 and Western Europe – productivity in recent years looks to have softened noticeably in many countries. In the US, GDP growth was weak at the end of last year, and the outlook has slowed further. It is perhaps not surprising, therefore, that US nonfarm productivity fell in Q4 at its fastest pace in more than a year. The Bureau of Labor Statistics measure of nonfarm business sector labour productivity, Output per Hour, contracted by 3% (q-o-q annualized), its biggest fall since Q1 2014. In Q3 2015 it rose by 2.1%. The slowdown in activity, coupled with an acceleration in hiring, contributed to the poor result (GDP growth rose by only an annualized 0.7% rate while nonfarm payroll additions averaged around 284,000 a month last year). A worrying lack of capital investment is clouding the outlook going forward, and despite increased employment, wage growth remains modest, albeit above the pace of inflation currently. With investment in IT down from its 1990s peak, the ‘virtuous cycle’ of productivity has definitely slowed. An ECB official admitted recently that much of what productivity growth there was is due to massive job cuts rather than “strong value-added growth.” This, of course, is creating structural unemployment problems. The UK’s challenge to overcome low productivity is similarly preoccupying the Bank of England. In the current climate of weakening growth and low reinvestment, our estimates do not point to a turnaround anytime soon.

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