Since the financial crisis, growth has slowed in the developed world. It is often assumed that this is an example of cause and effect. I showed in my previous post that this assumption is improbable, as much of the slowdown is the result of changes in demography — changes which are themselves largely the result of birth rates, which predate the crisis by many years. The other major cause of the slowdown has been a decline in productivity. Taken together, demography and productivity appear responsible for a minimum of 79 per cent of the decline in growth among the five developed economies I focused on — the US, UK, France, Germany and Japan.
Increases in productivity usually require investment in new equipment, but the extent of any productivity improvement will depend not only on the amount of the investment, but also its effectiveness. Where investment declines, a fall in productivity is likely unless the change is offset by a rise in the efficiency of new capital. Read more