Graph of the week

Graph of the week

21-07-2017 | Visión

Zombies hampering growth

  • Jeroen Blokland
    Portfolio Manager, Robeco Global Allocation team

Productivity growth has dropped to alarmingly low levels. And not just in the US, where the figure has remained below 1% for multiple quarters, but also in France and the UK. And even in Germany, the output per hour, the mostly widely used productivity measure, has risen only marginally since the financial crisis. Read on for the analysis by Robeco's Jeroen Blokland.

The sluggish productivity growth is definitely not good news. In a world with an aging − and thus, shrinking − workforce, stimulating productivity growth is actually the only way to make the economy grow faster.

Lack of innovation?

So economists are desperately trying to explain why productivity is growing so slowly. One obvious reason is innovation. History, and perhaps most notably, the industrial revolution, have taught us that technological innovation tends to boost productivity. That's why some economists, including Robert Gordon, claim that weak productivity growth can simply be attributed to a decline in technological innovation.

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Lack of money

But the reasons why we should question this conclusion are all around us. On an almost daily basis, companies like Amazon and Google, not to mention Tesla and Samsung, are proving that there’s certainly sufficient innovation to stimulate productivity. And to my mind, there are also enough fintech, biotech and alternative energy businesses launching new technologies that ought to boost productivity.

It seems more likely that it can be chalked up to the aftermath of the financial crisis and how central banks (yes, there you have them again) responded to it. After the financial sector teetered on the edge of disaster in 2008, banks were reluctant to fulfill what used to be their main role − that of money lender. The regulations introduced in the years to follow, particularly regarding capital buffer requirements, placed further limitations on lending. The graph below shows that to this day, growth in Eurozone corporate lending is considerably slower than before the financial crisis. So it goes without saying that at least some technological innovation has been lost, if for no other reason than that there simply wasn't enough capital available to make the necessary investments.

Central bank zombies

But that’s not all: The effects of the financial crisis ‘forced’ central banks all over the world to participate in a financial experiment that pushed interest rates down to extremely low − at times even negative − levels. These ultra-low rates meant that weak, non-innovative companies were still able to survive. In other words, the extreme measures implemented by central banks hamper productivity because they allow so-called ‘zombie firms’ to stick around longer than they would otherwise. And that's exactly the comparison being made in the graph below, which comes from the Bank of International Settlement's most recent annual report.

Incidentally, central banks, well, some of them at least, do not deny this. Recently, the Bank of England admitted that productivity would have risen between one and three percentage points more if the central bank had raised interest rates to pre-crisis levels. However, this would have increased the unemployment rate, which, according to the bank, was unacceptable. Whatever the case may be, it again goes to show just how far-reaching the effects of extreme central bank policies can be. Just think what might happen when they start reversing them.

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