Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 163

How will the global slowdown in productivity affect investors?

Over the past decade, productivity growth has markedly declined. This slowing is significant – it’s global and it started before the global financial crisis threw the international economy off course.

Moreover, this slowdown has occurred at a time when the rapid pace of innovation and technological change was generally expected to turbo-charge productivity.

And there’s more to come. Productivity seems likely to decline in the US in 2016, while growth is tepid in other affluent countries.

Productivity measures the output of goods and services relative to the input that goes into their production. The often-quoted observation of Princeton University professor Paul Krugman is spot on:

“Productivity isn’t everything, but in the long-run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” 

Krugman could well have added that productivity growth is also the main source of returns for investors over the medium term and longer, and a sustained fall in productivity growth means a reduction in those returns.

In the short term, however, it can help reduce unemployment. The US, Germany, Australia and New Zealand are creating more jobs from small increases in GDP than they would have had productivity growth been stronger.

Productivity is difficult to measure

Alas, productivity is hard to measure: the numbers jump around from quarter to quarter, and are subject to wide revision. Let’s put those problems aside for now and follow the suggestion of Jeffrey Kleintop, chief global strategist with US broking group Charles Schwab:

“The focus for investors shouldn’t be on the exact number [for productivity growth], but instead on the general trend that productivity is lower now than in the past.”

Kleintop outlines five strategies to help investors cope with the diverse effects of the productivity slowdown.

  • The return of inflation. Low growth in productivity, if sustained, will probably result in output increasing at a slower rate than demand – and thereby contribute to the return of inflation. Share investors would need to focus on companies that can best pass on higher costs – and, I’d add, those with money in interest-bearing investments would likely be attracted to floating-rate debt and inflation-linked bonds.
  • Shortages of tax revenue. With tax receipts likely to grow much slower than outlays on welfare and health, governments will face additional budget strains and deepening worries over high debt levels. Over time, interest rates would push higher.
  • Emerging market growth. In general, emerging market economies will have fewer problems than developed economies in adjusting to the global productivity slowdown, as they have greater scope to boost productivity by adopting innovations already in place in developed-market economies.
  • Profit margin pressure. Low productivity growth generally means faster growth in labour costs, which can squeeze margins. Share investors may need to favour companies “that can more easily substitute technology for labour or are less exposed to labour costs as a percentage of total costs”.
  • Less creative destruction. The US could see fewer business start-ups as the result of the slowing in innovation and in adoption of new technologies.

There’s a view widely held by those involved in international technology hubs that the slowdown of growth in measured productivity mainly reflects the difficulties in calculating productivity – particularly in service industries, that have been keen adopters of new technologies. However, as New York University’s Nouriel Roubini notes:

“if this were true, one could argue that the mis-measure of productivity growth is more severe today than in past decades of technological innovation.”   

Slow productivity growth seems likely to be prolonged by the low levels of business investment most economies have experienced since the GFC. The risks, too, are that productivity growth is further constrained by the populist backlash against policies such as globalisation and market-based reforms. These policies offer the best prospects for raising the rate of productivity growth.

Investors, among others, have a lot at stake regarding how the global productivity crisis is resolved. If near-zero rates of productivity growth persist, long-term average returns on investments will disappoint, inflation will return, government finances will be even harder to balance, and cycles in the economy and investment markets will widen.

 

Don Stammer is a former director of investment strategy with Deutsche Bank Australia. He now writes a fortnightly column on investments for The Australian.

 

  •   7 July 2016
  • 1
  •      
  •   
banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

Planning

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Superannuation

How much super should you have?

Average super balances are one of the most misleading benchmarks. They ignore your goals, spending and future needs, creating a false sense of security. Here is how I calculate exactly where I need to be at every decade.

Retirement

Retiring from work is easy, retiring into life is harder

Most people spend decades planning how to retire. Far fewer plan for what comes next. The biggest retirement challenge isn't always financial, and it often catches even the most prepared retirees completely off guard.

Shares

Right asset class, wrong index: the trap in Australian small caps

Most Australian portfolios are concentrated in large caps, with relatively little exposure to smaller companies. But what if the biggest risk isn't the economy, interest rates or valuations? For many, the risk is hidden in plain sight.

Property

Are these assets the missing piece in Australian portfolios?

Many investors remain concentrated in shares, cash and property. Despite their popularity among institutional investors, real assets remain underrepresented in many SMSF portfolios. Could they be the missing piece?

Investment strategies

The biggest risk that buy-and-hold investors ignore

Investors spend decades learning how to stay invested, yet few have a plan for getting out. When a financial goal has a hard deadline, a worked example shows why a fixed derisking schedule should outrank buy-and-hold discipline.

Investment strategies

How passive investing is driving the decline of active fund alpha

Why have active managers struggled as passive investing has surged? Research suggests that flows into index funds and ETFs are creating structural headwinds, penalising the stock-picking strategies that once generated alpha.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.