Labour productivity is falling again. Figures next week are expected to show that total hours worked in the first quarter rose by more than the 0.1 per cent rise in real GDP. That means output per hour fell, having risen nicely in the second half of last year.
This is a return to the new normal: before its jump late last year, productivity was only 0.1 per cent higher than its 2007 peak, implying a whole decade without significant growth.
It’s also perhaps the single most important economic fact. Without productivity growth, there’ll be little or no growth in real wages, and investors will continue to face low or negative real returns on their savings.
Worse still, productivity growth might remain weak. I say so because the outlook for its main determinants is not good.
Although economists aren’t sure exactly why productivity growth has slumped since the financial crisis, they agree that there are three big suspects.
One is world trade growth. Strong growth in this means that there is greater international division of labour – and we’ve known ever since Adam Smith that the division of labour raises productivity. Also, the more external trade there is, the more competition there is, which forces companies to raise their game.
Now, trade slumped after the crisis and recovered only slowly thereafter: even in the last five years it has grown by only 3 per cent per year, less than half its average rate from 1991 to 2007. Granted, it has accelerated recently: Dutch statistics group CPB estimates it rose 6 per cent in the year to February. However, this is partly due to strong growth in the eurozone which seems now to be slowing. Worse still, even the threat of a trade war or a messy Brexit will deter companies from investing in overseas sales networks which alone will retard trade growth. We cannot, therefore, rely upon trade being the booster to productivity that it was before the crisis.
A second cause of productivity is capital spending: the better our equipment, the more productive we’ll be. Again, this slumped in the crisis; business investment didn’t return to its 2007 peak until 2014.
In principle, capacity constraints should encourage companies to invest more. On the other hand, though, there are reasons for them not to do so: the prospect of continued weak demand; the fear of higher interest rates; Brexit-related uncertainty; and the fact that real wages are still low and so there’s no urgent need to replace labour with capital.
A third factor is that low interest rates and banks’ forbearance mean that inefficient companies – 'zombie firms' – have stayed in business. Even at the peak of the crisis there were far fewer company liquidations than in the 1990s. This has depressed productivity partly in the same way that keeping bad batsmen in the team holds down its batting average, but also because it slows down the extent to which workers and capital move to more efficient companies.
Here, though, there is reason to expect productivity to recover. Official figures show that company closures have recently increased. If zombie firms are a big cause of weak productivity, therefore, this should improve in coming months.
On balance, though, there are few reasons to expect a strong turnaround in productivity. Maybe the second half of last year was a blip in what is the new normality of weak productivity growth. This is bad news not just for workers but for savers, too.
