Productivity, Labour Markets, and Central Banks
Amongst others, the underlying issues that matter to the trajectory of growth include productivity, investment and labour market trends. The US is seeing higher productivity, but it seems to be an exception. There is little evidence to suggest that productivity has risen across developed economies. This matters as it constrains potential long-term growth rates.
The labour market across most major economies has seen structural changes with a narrower working base ahead, as more workers retire or drop out. The political cycle also seems to be focused on restricting the movement of labour which means that ageing demographics hamper potential growth rates as well. Of course, there are profound changes underway in terms of green investments and to some extent AI across the globe, but as yet, it is difficult to argue if this will lead to a permanent upward shift in productivity that can enhance potential growth rates.
In the interim, the Central Banks will be at the forefront of the transition, initially with less restrictive monetary policy but if macro conditions weaken and inflation returns to target, the pressure to go further will mount. Part of the problem for Central Banks is that fiscal policy has been exhausted to provide Covid support and will largely be channelled towards healthcare and pensions.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q1 2024 here.