June 6, 2017 / 9:17 PM / 2 years ago

COLUMN-Micro may conquer macro to bring outsized economic growth: James Saft

(The opinions expressed here are those of the author, a columnist for Reuters)

By James Saft

June 6 (Reuters) - Worries about stagnation aside, the bottom-up spread of technology like 3-D printing and artificial intelligence may give global productivity, and growth, a much-needed boost.

Growth in the developed economies over the past two decades has either been sub-par or artificially and often dangerously supported by debt and asset bubbles. One key factor behind this weakness, which leads some economist to argue we are in a period of “secular stagnation,” is the steady downward trend of productivity growth.

U.S. output per hour worked advanced on average only 0.6 percent annually over the past five years, compared to rates over 3 percent in the early years of the millennium.

Arguments rage over why, with some holding that all the low-hanging fruit of technological improvements has been picked and some that demographics are trapping us in a low-investment, low-growth world.

But investment manager PIMCO, with some supporting data from consultants McKinsey & Company, argues we may soon be seeing a dramatic increase in productivity as already discovered technology is adapted.

“A productivity-driven return to 'old normal' 4-percent-plus global GDP growth may lie within reach in the coming years, based only on the spread ('diffusion') of existing technologies,” Joachim Fels and Matthew Tracey of PIMCO write. (here)

They caution that this isn’t their base case, just a growing outside possibility, but it is hard to express exactly how surprising and electrifying this would be to investors inured to very low rates and low growth.

Many of the puzzles and features of the current economic landscape - very low or negative interest rates, quantitative easing and low growth - would be reversed or at least mitigated by structurally higher productivity.

There is no small irony too that what we are discussing is not the kind of top-down solutions which have failed or worked weakly in recent years, but a bottom-up story in which new technology is adapted and knit together in new ways to increase output.

To be sure, even this story doesn’t necessarily end happily, given that many of the technologies, from robotics to the use of computer-controlled printers to perform 3-D manufacturing, will destroy jobs and may increase income inequality. But even for this to happen, the adaptation of technology will need to quicken.


McKinsey, in a 2015 study, said it saw potential for global productivity to more than double its 1.8 percent average rate of growth over the past half century.

“Five sector case studies - agriculture, food processing, automotive, retail, and healthcare - suggest that annual productivity growth to 2025 in the G19 and Nigeria could be as high as 4 percent, more than needed to counteract demographic trends,” according to a report from the McKinsey Global Institute. (here)

That’s all premised on the intelligent spread of existing technology, and three quarters of the potential growth simply comes from the broader used of ‘best practices’ already significantly in use. Some of this is nothing more complex than the use, in places like Korea and Japan, of existing retail inventory management techniques. Some is more futuristic, like the use by Amazon of artificial intelligence and robotics to make warehouse and shipping management more efficient.

Or take for example U.S. healthcare, in which cumbersome information technology means doctors and nurses spend much time looking at screens, often at the expense of gathering more useful information from patients. Costs of new technology are also coming down, making it more feasible for individual dental practices to have 3-d printers. (here)

As implied, some of this is geographic, as technology spreads more deeply into emerging markets, while some is vertical, where smaller firms play catch-up to avoid destruction by the likes of Amazon.

The spread of technology will destroy jobs and tend to reward capital, of both the intellectual and financial sorts, increasing inequality and social and political tension.

Production, which has long spread around the world to arbitrage labor cost differences, will tend to gravitate towards end markets, both because it is less labor-dependent and also because more of the value is in proprietary software and processes.

That could throw up political roadblocks to adaptation, as a look at the recent flourishing of populist and often anti-globalization politicians illustrates.

Fels and Tracey of PIMCO argue that high-tech-driven productivity need not be a zero-sum game, and could lead to increased competition and employment.

One thing a boost to growth would definitely mean is a hit to the value of bonds, as markets re-set to a more normal yield curve.

There are worse problems to have, even for bond investors. (Editing by James Dalgleish) )

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