Is a productivity miracle set to stop US and UK from over-heating?

There’s a bubble, right? There is too much debt out there, stock markets look frothy, it’s going to end in tears. Well, don’t go so fast. There is another point of view that is altogether more optimistic, and recent news on both the UK and US economy lends support to this optimistic point of view.

Article updated: 12 October 2018 8:00am Author: Michael Baxter

Economic theory is unequivocal. If you stimulate an economy that is close to full employment you get inflation. US unemployment recently fell to its lowest level since Neil Armstrong took his golf clubs to the moon. Yet the US government is stimulating the economy with tax cuts. If that does not lead to inflation, forcing interest rates up much higher, nothing will.

The UK does not look so dangerously poised, all the same the level of unemployment is very low.

And sure enough, UK inflation hit 2.7 per cent in August, US inflation is at the same level.

Given the level of debt floating around the global economy, it is doubtful that the global economy can afford US interest rates to go up much higher.

This in turn has worrying implications for stock markets. In the long run stocks and the economy are correlated. If the stock market is to be believed we are set for an economic boom. If economic theory and indeed history is any guide, stocks are due a big fall.


But there is hope. This hope comes in the form of the fourth industrial revolution. McKinsey recently forecast that artificial intelligence could lift economic growth by an average of 1.2 percentage points a year between now and 2030. Throw into the mix the Internet of Things and robotics — then there is a chance that the economy can grow out of its current predicament. Instead of economic stimulus at a time of low unemployment creating inflation, it will create labour efficiency, or so goes the hopeful argument.

Until recently there was a fear that new tech would devastate the labour market — a number of recent studies have contradicted this view. The real constraint, they suggest, lies with the speed with which we can re-train the labour market.

I don’t totally agree. Whether new tech leads to economic boom depends on what happens to inequality. If the recent trend of technology hollowing out the labour market continues then I fear that consumers will not be able to spend at the level a growing economy needs. 

The snag

There is just one snag with the optimistic view expressed above — there is precious little evidence in the hard numbers that new technology is lifting the economy. As Nobel laureate Robert Solow said in the late 1980s, “computers are everywhere except in the statistics.” Or as Robert Gordon said: “Advances since 1970 have tended to be channeled into a narrow sphere of human activity having to do with entertainment, communications, and the collection and processing of information. For the rest of what humans care about — food, clothing, shelter, transportation, health, and working conditions both inside and outside the home — progress slowed down after 1970.”

An example

Let me cite an example — Amazon. It has just increased the minimum wage it pays staff, and by a healthy margin. Is Jeff Bezos going soft in his old age? Maybe. Or maybe, Amazon anticipates a labour shortage and is attempting to buy staff loyalty. But might it react by investing in more automation, lifting staff productivity?

Hope in the numbers

I am pleased to report some good news. UK labour productivity (output per hour) jumped by 1.4 per cent in Q2 compared to the year before. That is not as fast as the economy needs, but a good deal faster than the rate we have become used to since 2008. The hope is that the trend will continue.

In the US, labour productivity grew at an annualised rate of 2.9 per cent in the second quarter.

In both the UK and US, productivity growth was the fastest since 2015. It is just that post 2015, this growth rate slowed down.

The data I refer to is not sufficiently good to justify a celebration. It depends on what happens next, but there is reason for some hope.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.