It's not rocket science

The case for cyclical improvement, by now, is widely shared in the marketplace. But, in one respect, our outlook is more optimistic: we see a compelling case for structural improvement over the longer horizon too. For much of the past couple of decades the impact of innovation has underwhelmed many forecasters – with Nobel Prize winner Robert Solow famously quipping that “you can see the computer age everywhere but in the productivity statistics” and former US Treasury Secretary Larry Summers talking about secular stagnation. Today’s prominent breakthroughs, a tech investment boom and the adoption of digital technologies during the pandemic are combining to raise hopes of significant and more pervasive innovation reviving growth and productivity. The US and China are at the forefront of this new wave, which is likely to spread across sectors globally.

Productivity may accelerate over the multi-year, structural horizon for three reasons:

Reason #1 | Breakthrough innovation: The success of the ‘messenger RNA’ approach behind the Pfizer-BioNTech and Moderna vaccines, and of bespoke antibody treatments, shows how science continues to transform medicine and genetics. Artificial intelligence is finally displaying significant progress in a range of promising fields, from predicting the shapes of proteins to natural-language recognition and driverless taxis – with Waymo having recently launched its fully automated, robo-taxi ride hailing service in Phoenix, Arizona. There’s likely much more to come and many services sectors, including healthcare and education, would benefit greatly from more innovation. Synthetic biology and robotics could up-end how almost everything is produced and consumed.

Reason #2 | Booming investment in technology: In the US, investment in intellectual property products now exceeds 5% of GDP. Investment in software has nearly doubled as a share of the overall economy over the past dozen years. Investment in computers and peripheral equipment jumped to a fresh record lately. As a result, non-residential investment is hitting new highs, which is all the more impressive as investment in structures – things like shopping malls, commercial property, hotels, hospitals and airports – continues to fall. Having shrunk for years, public spending on research and development across the major advanced countries and some of the key emerging ones has started to grow again in real terms, with the latest figures showing a healthy 3% rise.

Reason #3 | Rapid adoption of new technologies: It’s not just that workers have taken to videoconferencing and consumers to e-commerce. The pandemic has also accelerated the adoptions of digital payments, telemedicine and industrial automation. Rapid technological advance has been the norm in the history of capitalism: the 18th century brought the Industrial Revolution and mechanised factories; the 19th century railways and electricity; the 20th century cars, planes, modern medicine and consumer electronics; the 21st century is bringing us the ‘internet of things’, the sharing and circular economy, and robotics not just in factories – global orders for Japanese industrial robots are spiking, with China now the largest market – but also in warehouses and back offices.

Here’s why this matters:

From secular stagnation to secular revival: As they get richer, consumers tend to spend a greater share of their income on labour-intensive services, such as experiences and entertainment, in which productivity growth is slow because automation is hard to achieve. And population ageing will continue to suck workers into low-productivity sectors – such as at-home care. Yet it’s reasonable to assume that a fresh wave of innovation may start reversing the fall in productivity of the past few years. An analysis presented at the latest (virtual) meeting of the American Economic Association shows a growing number of vacancies for robot technicians and programmers in businesses that are well-suited to the adoption of artificial intelligence. Its key takeaway is that the right kind of automation could generate large productivity gains. What’s more, its transformative nature could lead to the creation of new tasks (and, therefore, possibly also jobs) for humans.

From tech to tech-enabled sectors: Technological disruption has impacted all sectors to varying degrees but, broadly, it’s reshaping entire industries worldwide. Companies employing ‘old economy’, legacy business models have been hit by this ‘creative destruction’, ranging from print media to brick-and-mortar retail. Even though this structural change has led to the rise of a new generation of tech winners, more often these days disruption doesn’t just come from pure tech companies. It also comes from players in other industries using technology to gain an edge over less innovative incumbents. Autos are the embodiment of digitalisation: the number of new chips in today’s cars has soared, fuelling bottlenecks in the semiconductor industry. Car companies have been caught out by a surge in vehicle demand, but the key here has to do with digitalisation across sectors – from smartphones and consumer electronics to logistics and medical care.

Meanwhile, while this trend progresses, let’s watch the ups and downs around it…

All I need is love: Saint Valentine’s weekend hasn’t really brought us great macro news. There’s an inherent trade-off between better number on the Covid-19 front – with new daily cases falling in many parts of the world and vaccines being rolled out more quickly – and somewhat worse economic numbers as lockdowns continue. The silver lining, though, is that adaptability to the restrictions has increased, which is why activity is weak but no longer falling off a cliff. The purchasing managers’ indices should reveal that manufacturing remains relatively resilient globally, while services look particularly sluggish in Europe. We expect an improvement first and foremost in the US and UK from next quarter, when we expect the upcoming fiscal boost to feed through in the former and the vaccination effort to allow the start of reopening in the latter.

Daniele Antonucci | Chief Economist & Macro Strategist