U.S. Gets More Productive, Europe Eats More Cake

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Increased productivity allows firms to produce more output with the same level of input. This, in turn, allows for higher profits and the ability to pay higher wages without eroding profit margins or stoking inflation. U.S. productivity advanced 1.9% in 4Q18, a move up from 3Q18 and affirmation of an encouraging trend higher. Annually, the 1.4% increase was the best reading since 2010. Below trend productivity began to turn around in 2017, and it wasn’t caused by a surge in sales of energy drinks.

The means of improving productivity are straightforward — new technologies, investment in human capital with education and training and physical investment in machines and infrastructure. The 2017 tax reform offered incentives to businesses to invest in new technologies and equipment to increase output. The deregulation overhaul made it easier for competition to jump into the market with greater efficiency. Hence, better productivity and improved economic growth allowed the Federal Reserve to raise rates eight times in the last two years.

Europe has failed to receive the memo. European economic growth for 2019 has been slashed from 1.7% to 1.1%. Although 4Q18 GDP growth picked up slightly, the European Central Bank isn’t taking any chances. ECB President Mario Draghi unveiled a new round of “sugary” central bank stimulus in the form of cheap bank loans (TLTRO – Targeted Longer Term Refinancing Operations), its third round since 2016. In addition, the ECB’s guidance revealed that rates will remain on hold for the remainder of 2019.

Please watch U.S. productivity on page 65 of the Global Perspectives book.

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