Over the last 15 years, weak capital investment in rich countries has held back productivity growth. But that may be about to change.
Why it matters: The pathway to higher incomes and standards of living rests on economies finding ways to deploy their labor forces more productively.
- The dearth of productivity growth over the last couple of decades has held back incomes in the U.S. and other rich countries, according to a report out Wednesday from the McKinsey Global Institute, the research arm of the global consultancy.
The big picture: Productivity growth has been weak in the U.S. and Western Europe since the 2008 global financial crisis, but things looked better among many emerging markets.
- The McKinsey report finds that global labor productivity growth was 2.3% a year from 1997 to 2022, a rapid rate that has increased incomes and quality of life in large parts of the world.
- China and India account for the largest portion of that surge — half of overall global productivity improvement, with other emerging markets accounting for another 25%, led by Central and Eastern Europe and emerging Asian economies.
By the numbers: In the U.S., the report finds that the decline in capital investment following the 2008 financial crisis has resulted in a $4,500 lower per-capita GDP in 2022 than it would have if pre-crisis trends had continued.
- Rapid advances in manufacturing technology, especially for electronics, petered out in the same time period, subtracting another $5,000 from per-capita GDP.
- “Digitization was much discussed as the main candidate to rev up productivity again, but its impact failed to spread beyond” the tech sector, the authors write.
Yes, but: The authors are optimistic that a confluence of factors will make the years ahead different.
- The rise in global interest rates and inflation are evidence of stronger global demand. Many countries are experiencing labor shortages that may incentivize more productivity-enhancing investment. And artificial intelligence and related technologies create big opportunities.
- “Inflationary pressure and rising interest rates could be signs that we are leaving behind secular stagnation and entering an era of higher demand and investment,” the report finds.