Hoping for a normal, not a New Normal, recovery - The Monday Briefing

Monday Briefing growth
It is perhaps odd that despite gloomy news stories about the risks to growth the world economy is recovering. And this is a rare thing, a synchronised global recovery with activity strengthening in developed and emerging markets for the first time since 2010.

Leading indicators for growth are flashing green. Singaporean export growth, a barometer of global demand, has hit a two-year high. Chinese electricity consumption has rebounded.

Arguably Europe’s most important economic indicator, Germany's Ifo business confidence index, is near a three-year high. In the UK, optimism among manufacturing companies has reached its highest level since 1995. Surging North American rail freight volumes point to growing demand. Across the world the regular economic data are coming in on the strong side of expectations.

This all sounds good, and it is. But the pace of this recovery doesn’t look likely to take us back to the sorts of growth rates that were seen before the financial crisis. Global growth is running around 80% of its pre-crisis levels. This so-so performance has been dubbed the New Normal.

Escaping the New Normal requires a recovery in productivity growth. Most rich countries have seen rates of productivity growth slow since 2009. In the UK, for instance, productivity growth has fallen from an annual average of around 2.0% a year before the crisis to about zero.

The central challenge is to manage labour and combine it with capital more effectively. Better education and training could help, so, too, would raising low levels of capital spending. The Bank of England’s Chief Economist, Andy Haldane, last week argued that part of the problem lay in poor management in middle sized businesses.

What is clear is that getting productivity moving would create a virtuous circle in which improving growth prospects buoyed business confidence and investment.

Our own CFO Survey shows that the investment plans of large UK-based corporates has been subdued for much of the last year. The last two surveys have indicated a small improvement, and the release of the Q1 survey next week should offer some clues as to whether the ‘animal sprits’ of businesses are returning.

An explosion in productivity drove the economic expansion of the last 200 years. Society learned that improving efficiency improves human welfare. As Paul Krugman, the economist and Nobel laureate put it, "Productivity isn't everything but in the long run it is almost everything".