The productivity slump in the advanced economies: Explanations and need for action

Almost seven years may have passed since the collapse of Lehman Brothers set the latest global economic crisis in motion – yet the lingering feeling of crisis remains. Although the global economy has bounced back since the traumatic year of 2009, the pace of recovery has been anemic in most cases, particularly in the developed countries. And that's not all: expected potential growth has weakened virtually across the board as well, meaning that the years of financial and economic crisis are likely to have been more than just a temporary blip, but rather an event resulting in irreversible damage. In the case of the US, for example, this drop in potential growth is estimated to total around five percent since 2007 ; this brings the total estimated loss in prosperity to around USD 900bn in 2014. So it comes as little surprise that many observers are already describing the situation as one of "secular stagnation", a prolonged phase of disappointing growth.

There is a myriad of reasons behind the weak development of late: ballooning debt, antiquated labor markets, a lack of competitiveness, to name but a few. Their significance also varies from country to country. Almost all countries, however, have one thing in common; productivity growth is very weak.

This development is deeply alarming. After all, in the medium to long term, productivity growth is the main factor driving general economic growth. This applies all the more so if we consider that, in the not-too-distant future, one of the key growth engines that drove the world's advanced economies in the past, a growing working population, will turn into exactly the opposite. Without productivity growth, the European countries, in particular, will see their economic strength dwindle. If this happens, it will be virtually impossible to master the challenges that the future has in store, from the costs associated with an aging society to the costs of the energy transition. In a nutshell: without productivity growth we will be unable to maintain the level of prosperity we have become accustomed to.

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