Yes there really is a statistic of the decade. It’s 0.3 per cent, and it matters rather a lot. It explains almost everything, and understanding whether it can be changed in the next decade could be the secret to beating the markets.
The statistic of the decade highlights the most important challenge of the next decade
Recently, the Royal Statistical Society revealed its choice for statistic of the decade. Actually it announced two: the International Statistic of the Decade and the UK Statistic of the Decade. The former was 8.4 million and described the land which makes up the Amazon rainforest, measured in terms of soccer pitches, which was subject to deforestation. This was indeed a worthy winner, but since the purpose of this column is not to preach about the dangers of climate change but to inform investors, I want to focus on the latter.
The UK winner was 0.3 per cent. It describes average annual growth in productivity in the last decade. The average growth in productivity per year before the 2008 crash was two per cent.
This statistic explains why wage growth has been so weak. In my opinion, weak wage growth explains the backlash against immigration, (as people look for someone to blame and unscrupulous politicians shift the focus on immigrants, even though there is little to no evidence to support this) and this in turn created the momentum for Brexit. Poor growth in wages has led to political polarisation.
To understand the significance we need to dig deeper. Weak productivity growth is not unique to Britain, but the problem manifests itself in different forms across the developed world. In the UK, the focus of policy makers has been employment, and the especially low productivity growth rate in the UK is partly the price we have paid for record high employment. In France, productivity growth has been greater, but unemployment much higher too. But why is it necessary to have this trade-off between employment and productivity? Before 2008 we had both.
A superficial cause of weak productivity is low investment. Some blame private equity and share buybacks as companies use profits to fund investor giveaways rather than investment. But maybe the problem is the other way around and investment is low because productivity growth is modest — there is no point in investing if this does not lead to growth in productivity. Or maybe, low consumer demand is insufficient to justify investment.
Personally, I think a partial fix lies with infrastructure. The UK government should take advantage of ridiculously low bond yields to overhaul the UK transport infrastructure, maybe by creating a new, ultra-modem railway network involving driverless trains. Coupled with this, it should throw resource at the most dynamic of all sectors — the start-up scene.
But, from an investor’s point of view, there is one issue that bothers me. How is it that while productivity growth languishes, stock markets boom. There is a disconnect and I don’t see how such a disconnect can last.
Theories to explain weak productivity abound. Maybe the problem is one of weak demand caused by the global savings glut, partially caused by ageing across the advanced world. Maybe, as the economist Robert Gordon suggests, technology is the problem and that for all the much hyped benefits of modern technology, it has created very little in the way of tangible benefits.
Professor Gordon may or may not be right about the last decade, but my own view is that history shows there are often lengthy time lags between innovation and impact on the economy.
The second decade of this century provides the precursor to the fourth industrial revolution. The true benefits of AI, the Internet of Things, automation, 3D printing, falling cost of renewables, drone technology, stem-cell technology, genome sequencing and gene editing, and quantum computing, will only start to emerge in the 2020s.
The result will either be a golden age of productivity growth, or, if I am wrong, and anaemic growth in productivity continues, then there will be a major stock market crash as valuations correct.
I suspect we will see both. Weak growth will continue for a few years, there will be a mother of a stock market crash, then the economic benefits of the fourth industrial revolution will kick-in, creating extraordinary opportunity, especially for investors who dive in immediately after the crash.
There is one other important side effect of the fourth industrial revolution. AI and the internet of things in particular should help reduce waste.
The modern economy relies on inefficient consumption — on us buying more food than we need, for example.
An obvious way in which this could change lies with car sharing as the age of driverless cars emerges. Cars spend 95 per cent of their time parked. Imagine how the car industry will be transformed if car sharing means we buy say 80 per cent less cars.
But I am not sure how technology for reducing waste would affect productivity. Is it possible we could create an economy which sees much more efficient use of what we already have, creating greater median prosperity, without growth in output? If so, what would the implications be for investors?
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees