Who remembers the glory days of U.S. productivity growth? Former Fed Chief, turned author Alan Greenspan was found of pointing to the virtue of steady gains in U.S. productivity growth during his tenure at the Federal Reserve.
Healthy rates of growth in per capita economic output, or output per man hour (aka productivity), was seen as a recipe for steady, non-inflationary economic growth. Greenspan pointed to strong productivity growth in the U.S. as a main reason why employment remained strong (at least while he ran the show) without pushing up wage-cost inflation. This in turn kept interest rates low, which helped spur more business investment in, you guessed it, productivity-enhancing technologies.
It was a nice virtuous circle, while it lasted in the 1990’s and on into the early years of this decade. But last year U.S. productivity growth slumped to an anemic 1%. Now however it appears the epicenter for productivity growth – as is the case for overall global growth – has moved to emerging markets.
U.S. Productivity “Dismal”; Other Developed Nations Aren’t Much Better
A recent article in the Financial Times points out that major, developed nations have witnessed “sluggish growth” in productivity in recent years. Meanwhile, emerging markets are now carrying on the Greenspan legacy with faster rates of productivity growth than ever before.
“In 2007, the US experienced another dismal year of productivity growth,” says the article, with productivity (defined here as gross domestic product per hour worked) rising just 1.1%. That’s down sharply from average U.S. productivity growth of 2.1% between 1995 and 2007. The European Union scored only slightly better, with 1.3% productivity gains last year. Japan was similar.
But productivity hasn’t vanished entirely, like some endangered economic species. No, it has simply moved on – like so many other economic advantages – to emerging markets. The article points out that “many emerging economies now seem able to sustain much faster increases in economic efficiency.”
BRIC Productivity “Accelerating”, But So is Inflation
While U.S. productivity gains have been cut in half, the phenomenon appears to really be catching on big-time in the BRICs.
China’s productivity growth, like its economy, has been accelerating for years, and (get this) exceeded 10% in 2007! India and Russia are posting productivity growth rates close to 7% over the last two years.
That’s up from an average of just 4% for both nations in the 1995 to 2007 period. Brazil is lagging in the productivity party, but is catching up fast, with growth of nearly 2% last year. That’s far better than the U.S., and up substantially over Brazil's average gains during the 1990’s.
Overall, the four BRIC economies averaged productivity growth of more than 8% last year, compared to just 1.2% for the G7 nations!
In the Greenspan era, high and sustained rates of productivity gains were believed capable of keeping a lid on inflation. Considering elevated readings on inflation in Russia (+12%), China (+7%), and India (+5.5%) recently, the BRICs are certainly hoping that Greenspan was right and productivity will come to the rescue. Stay tuned!
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