Economic activity in advanced economies is encouraging, but productivity is lagging

The recent increase in economic activity in the G7 advanced economies is attracting the attention of policymakers – particularly those gathering in Washington DC for this month’s World Bank-IMF Spring meeting.

But is the optimism justified? And more importantly, can the growth be sustained? In their latest Global Economy Watch, PwC’s economists turn their attention to the advanced economies – and call on business to help boost productivity rates.

The economists say that ‘hard’ data indicates a slight acceleration in G7 economic growth to 1.7% year-on-year in the last quarter of 2016. The average growth rate post crisis is 1.8%. Furthermore, what is driving the optimism is the broad-based nature of the recovery across the G7, as indicated by less variation in growth rates across countries than at any time in the past 20 years.

Three reasons for this turnaround have been identified by the PwC economists:

  • First, the continued highly accommodative monetary stance across the G7 and, in particular, in the Eurozone, despite the gradual rise in US rates from historic lows recently.
  • Second, governments are starting to spend more, with some putting infrastructure plans in place.
  • Third, an uptick in demand from the large (E7) emerging markets, partly driven by a fiscal stimulus in China, as well as a turnaround in economic activity in Brazil. This is corroborated by recent trade data, which shows that emerging markets’ imports continue to grow compared to a year earlier.

So, will this continue in the future? Most ‘soft’ survey-based data suggests the momentum has carried on through the first quarter of this year. This will not be confirmed until the ‘hard’ data on GDP is released later this month, starting with the US and UK on April 28th.

“But policymakers’ discussions should focus on the key factor which determines long-run standards of living: productivity. Barret Kupelian, Senior Economist, PwC says: “Our analysis shows that post-crisis productivity growth in the G7 has been around two thirds slower than its long-run average rate.”

Typically, governments take on the task to push through economy-wide reforms. For example, they can help drive large public investment projects or invest more in schooling.

“But we think that businesses have an equally important role to play, particularly from a bottom-up perspective,” adds Barret Kupelian.  “Best practice management techniques, for example, could have an impact on national productivity rates if implemented across a large number of businesses.