Toby Nangle of Columbia Threadneedle argues that rising wages and improving technology in the US may help to bring the country out of its productivity slump.
“I’ve spent 20 years almost never getting involved in issues like productivity – until the last year or two,” says Toby Nangle, Global Co-Head of Asset Allocation at Columbia Threadneedle. “And the reason the last year or so has become so important is that there has been a five-year change in GDP per unit of labour. Basically it’s been around zero for the past five years – and that’s astonishing.”
Productivity, which measures the economic output per worker, is an enormously important factor in driving economic growth – and one that western governments are increasingly focused on. In more typical times, US growth has been largely driven by productivity gains – positive data had therefore meant that productivity was not an area that economists needed to worry about. But in recent years growth has had to come from elsewhere, and productivity has dipped dramatically.
“The US has been growing at 2% per annum,” says Nangle. “But the labour force has been growing at 2% per annum as well, in terms of the number of hours worked and the number of people being employed. So the US economy has only grown because people basically are working longer and not smarter – and that becomes important.”
Yet US employment is now at a historically high level – unemployment has dipped rapidly from 10% to 5% in recent years. In short, the US is approaching what economists view as full employment. That promises wage growth, but Nangle believes this points to the current policy ‘trilemma’ faced by governments – in a trilemma, you can choose only two out of three possible outcomes or priorities.
“Policymakers want high corporate profits, because you don’t want a corporate crash,” says Nangle. “You want steady levels of inflation, because you’ve got an independent central bank that is specifically mandated to deliver price stability in accordance with 2% per annum; but you also want nominal wage growth.”
In recent years, Nangle points out, inflation has been kept down and corporate profits have (until the last few months) been high, but people haven’t been seeing an improvement in their pay packets.
“I call this the Goldilocks slump,” says Nangle. “It’s a brilliant environment for owning bonds, because the inflationary threat is never there, and the central bank is never going to put up rates. Equity prices get pushed up too, although not because it’s a great environment for earnings.”
Yet Nangle believes a shift is now underway – and it is a shift that could boost productivity. When it comes to which outcome is likely to be jettisoned out of good corporate profits, controlled inflation and wage increases, Nangle believes that controlled inflation may be the natural candidate.
“We could move into what I call ‘money illusion’,” says Nangle. “That means we continue to have high corporate profits and nominal wage growth, but central banks give up and start to miss their inflation targets. So inflation rises and bonds sell off. Commodities would do well in this environment.”
There is an alternative, however: ‘people power’. Under this scenario, wages go up and inflation is kept under control – the loser is corporate profits.
“We’d see profit margins fall severely,” says Nangle. “It’s actually not a bad one for bonds because inflation remains low and breakeven inflation rates remain steady.”
Both scenarios point to higher wages which, in turn, raise the possibility of a long-overdue productivity resurrection.
“There could be a big productivity rebound as rising wages incentivise automation,” says Nangle. “At a time of rising wages, it’s easier to invest a million pounds in a new plant that only needs just four people instead of spending the money on twenty new staff at a time of rising wages. That means technology receives greater investment than personnel, which in turn raises your productivity per head. So we could now see a significant rise in technology investment.”
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The opinions expressed are those of Columbia Threadneedle Investments, and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.