Opportunities from digitalisation outweigh risks of "secular stagnation"
Digitalisation is dramatically changing the face of the economy. Whether it is self-controlled robots in industrial production, the interconnection of production processes in the Internet of Things, or the use of self-driving vehicles – all these developments have the potential to have a massive impact on economies and societies.
There are many plausible reasons for this "productivity paradox" – from evident conceptual failures in measuring GDP to the consequences of sectoral change because new (but less productive) jobs are being created, mainly in the service sector. But fears about continuing weak economic growth and its consequences for politics, society and the financial markets are growing, particularly as attempts at explanation include the theory of "secular stagnation", much debated by economists. One indicator is the persistently low investment ratios in industrialised countries since the financial crisis. While the ratio of investment to GDP averaged 23% in the years 1999–2008, since 2010 it has averaged only about 21%.
If the theory of secular stagnation turns out to be correct, and we are actually on the brink of a longer period of weak economic growth, then the outlook for interest rates – both base rates and long-term bond yields – is rather sombre. This is the view of some economists and central bankers, including Jerome Powell of the Federal Reserve. But are such scenarios at all important?
I am convinced that we are worrying too much, and placing undue weight on current productivity weaknesses. In earlier periods of great economic change, the positive effects of the industrial revolutions were also not immediately clear. Often it is mostly negative effects and the resulting concerns about social consequences that draw 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 evolve over the long term, and create many new jobs. And these in turn boost 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. Nobel Prize winner Robert Solow said in 1987: "You can see the computer age everywhere but in the productivity statistics." 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.
But this mindset does not help in the short term. We must continue on the basis that, despite all risks from the global economic environment, the gradual economic recovery will continue. I expect global growth to begin to pick up no later than next year. This will prepare the ground for a measured increase in inflation, and thus also for interest rates. And when the positive effects of the digital revolution begin to show in economic indicators – five to ten years is a realistic perspective – these additional boosts to growth will also provide a perceptible impulse for normalisation of interest rates. We should not be deluded into believing that the current macroeconomic environment and historically low interest rates are irreversible.