Worrying decline in productivity

“A resumption of construction work for the East Coast Rail Link, Light Rail Transit 3 and other mega projects should pull productivity growth back up, starting from the third quarter this year,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

The decline in productivity, exacerbated by the current decline in manufacturing worldwide, is causing grave concerns.

Already a problem prior to trade wars, productivity could decline further if recession sets in, possibly caused by trade and Persian Gulf conflicts.

Manufacturing is a sustainable sector for productivity growth but due to the global slowdown and uncertainties from trade fights, it is on the decline even in the advanced countries.

These uncertainties and supply chain disruptions are leading to a drop in business investments, which will have a long term impact on the growth of manufacturing.

To fight the slowdown, countries may use fiscal spending to boost construction and domestic consumption.

But we cannot depend too much on construction which is highly cyclical in nature.

Spending related to the construction sector has limited spillover effects in the long term, which will only force governments to go on spending.

Due to the relocation of manufacturing hubs away from China, Malaysia and some other South-East Asian countries may be lucky to receive more inflows of foreign direct investments.

But that cannot be a long-term solution to the worldwide drop in manufacturing activities and investments.

For Malaysia, the drop in construction activities had been a major factor in the slowdown of productivity growth.

“A resumption of construction work for the East Coast Rail Link, Light Rail Transit 3 and other mega projects should pull productivity growth back up, starting from the third quarter this year,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

Productivity is a measure of efficiency, taking into account output and costs.

Growth in productivity means that more goods and services can be produced with the same amount or less of inputs; it will lead to higher standards of living as increased real incomes boost the ability to spend.

Among drivers of productivity growth include investment, innovation, skills, enterprise and competition.

Extending the slowing trend, global labour productivity growth had declined from an average annual rate of 2.9% between 2000 to 2007, to 2.3% between 2010-2017, said The Conference Board, a global business research organisation.

While stronger productivity growth is a necessary requirement for higher standards of living, declining productivity can lead to short-term crises, said Anthony Dass, head of AmBank Research.

Economic growth and incomes could be affected. Changes in business behaviour such as declining business sentiment and investment are factors to be urgently addressed in the recent slowdown in productivity growth.

Foreign direct investment around the world had slumped by 41% in the first half of 2018, against the same period in 2017; the US$470bil invested across borders was the lowest since 2005, said WorldFinance.

At the World Bank, its policy uncertainty index had hit a record on factors such as higher US tariffs on Chinese imports and Brexit woes; rising political uncertainties are a major reason for the slowdown in trade and collapse in investments.

Businesses plan their investments based on expectations of future consumption.

What is puzzling is that the return to capital has increased but investment has not.

Instead of being re-invested, these higher profits could have been distributed back to shareholders in the form of dividends and share buybacks.

Or these higher profits could have come from increased business consolidation and market or monopoly power that allows firms to raise prices.

A more consolidated market with less players could lead to less investments.

“Declining business investment and dynamism should concern policymakers,’’ said Dass.

Global economic growth will slow in the longer term unless governments and businesses find ways to increase productivity.

There needs to be a brisk increase in productivity, as the headwinds of ageing population and declining labour force will limit economic growth potential, said Lee Heng Guie, executive director, Socio Economic Research Center.

Technological innovation is a powerful strategy to revitalize the global economy but policymakers have to take into account the barriers to innovation and diffusion of technology.

Even before the 2008 financial crisis, researchers had pointed to factors that had offset the positive impact of technology on labour productivity, said Deloitte Insights in its article on ‘Understanding the Productivity Paradox.’

These include slower accumulation of human and knowledge-based capital; a mismatch of skills, the pace of labour and product reforms; slower global integration of economies and poor safety net for displaced workers.

Following the crisis, headwinds related to the crisis and the abruptness of the (financial) shock had piled onto those structural barriers to technology, accelerating the slowdown in productivity growth.

Some of these factors, topped by current conflicts, may remain significant challenges to global productivity growth.

Columnist Yap Leng Kuen notes the quote from Paul Krugman: ‘Productivity isn’t everything but in the long run, it is everything.’