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Economy

Innovations create stimulus for growth

Digitalisation is revolutionising the workplace and the economy. Factories are already using increasingly self-controlled robots, and autonomous lorries and freight trains are no longer a thing of the future. The advantages for business speak for themselves, but the rapid progress achieved over the past 15 years is not yet evident in important economic indicators. However, over time, digitalisation is expected to create significant growth stimulus, as has been the case with past technological advances such as the computerisation of the 1980s and 1990s. Concerns about a secular stagnation, that is to say a phase of long-term negligible economic growth and low interest rates, are therefore likely to be unfounded.

18.04.2017

Here are the facts as they currently stand: the economic environment and outlook for many industrial-ised countries has improved over the past few months. Despite numerous political risks, economic growth in the advanced economies is expected to total around 1.9% in 2017 (compared with 1.7% in 2016), and rise somewhat to 2.0% in 2018. Interest rates are also appreciably higher than in the middle of last year. 

Yet that alone is not enough to sound the all-clear for economists worried about secular stagnation. After all, short-term developments such as increased demand among consumers and high govern-ment expenditure play a significant role as well. The long-term drivers of economic expansion, in particular productivity growth and expenditure on investments, do not seem to reflect any trend reversal yet. Measured in terms of gross domestic product per hour worked, labour productivity in the G7 countries stagnated in 2016. Even according to the less volatile five-year average (2012–2016), the growth rate was a mere 0.4% – compared with a rate of 1.0% for the period 2007–2011, and significantly higher growth in the years before that. (diagram)

Digitalisation should trigger appreciable growth impulses, even if this is not yet reflected in economic data © The Conference Board 2016
Decreasing growth in labour productivity in G7 countries
G7 labour productivity growth decreased, positive effects from digital revolution may take some time

Paradigm shifts in technology often raise worries about potential consequences

Nevertheless, the observable decline in productivity growth in industrialised countries is not automatically at odds with the number of innovations that have gained importance mainly in connection with digitalisation in recent years. In earlier times of major economic upheavals, the positive effects of these industrial revolutions were also not immediately clear. Often, it was the negative effects and resulting concerns about social consequences that drew immediate attention – as was the case with the collapse of whole economic sectors that became unprofitable after the invention of the steam engine. However, new economic sectors evolved over the long term, and created many new jobs. And these in turn boosted productivity dynamics and economic growth.

From today’s perspective, it may take some time before the current digital revolution has reached every far corner of production processes and workflows. Even the first wave of computerisation in the 1980s took some time to generate noticeable productivity growth on a macroeconomic scale. For example, growth in labour productivity in the USA averaged just 1.3% per year between 1986 and 1995 – but increased to 2.5% over the following ten years. In addition, in the past two decades, dynamic economic growth was fostered in particular by those sectors of the economy that are largely driven by ideas and know-how. And according to estimates made by Prognos for Germany, digitalisation accounted for 0.6 percentage points of growth – almost half the annual rate – in the years 1998–2012.

Insurers invest in start-ups with digital business models

Innovation is highly relevant for companies confronted with increasing changes as a consequence of digitalisation. By way of example, the insurance industry – a sector whose degree of innovation is traditionally said to be low – is ramping up its efforts to tackle the challenges of the “digital revolution” – for instance, by cooperating with start-up enterprises that have digital business models or by investing in these. Whilst only four strategic investments were made in technology start-ups in 2013 according to information reported by data provider CB Insights, 100 such deals were transacted by insurers in 2016. Here too, the quantitative effects on the insurance markets will only begin to show gradually.

There is one trend, however, that could jeopardise the positive economic impact of innovation in the long term, and that is that the socio-political shift towards greater protectionism in a number of industrialised countries, in particular lately in the USA, could have negative implications for the long-term outlook. After all, innovation and global economic integration are closely interlinked: they provide young innovative companies all over the world with access not only to capital but also to new markets. In addition, they give these the opportunity to recruit skilled labour from other countries. And established companies gain access, via cross-border value chains, to the best possible innovative production processes used. 

Digitalisation trend will bring appreciable growth impulses

Besides this, international enterprises no longer conduct their innovation activities only in their home countries. General Electric and IBM, for instance, have set up major European research centres in Munich, and BMW runs several research facilities in the USA. Productivity improvements are easiest to implement through an international network, and they promote the competitiveness of the companies involved at their respective locations. And, in the long term, innovative and competitive companies contribute significantly to economic growth and the greater prosperity of whole economies. 

On the whole, the expectation is that the digitalisation trend will lead to appreciable growth stimulus in the long run. The size of this impetus is difficult to forecast. But we believe that the statement made by Robert Solow, winner of the Nobel Prize in 1987, with regard to the effects of the Computer Age, also applies to digitalisation: “You can see the computer age everywhere but in the productivity statistics.”
Munich Re Experts
Oliver Büsse
Senior Economist
Michael Menhart
Chief Economist at Munich Re
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