ICOR’s

In the US, real gross domestic product per head has grown at a stable rate over the long-term, with glitches such as the one caused by the Depression being made up by subsequent recoveries.

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In my last blog, I showed that the trend growth rate of the US indicated by its Incremental Capital/Output Ratio (“ICOR”) was only 1.6 per cent per annum. As the US population is likely to grow at 0.8 per cent per annum over the next ten to twenty years, this would allow gross domestic product per head to rise at 0.8 per cent per annum. As chart one shows, this is well below the post-war average and is almost identical to the growth achieved over the past ten years. Continuation of recent growth would probably disappoint most expectations.

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The gross domestic product data for the second quarter of 2014 showed that the US economy bounced back strongly, and with enough vim to justify the view that its first quarter weakness was largely due to bad weather.

However, the productivity figures provided another bad surprise. In the first quarter GDP per hour worked fell, and it would therefore have been reasonable to expect it to improve with the sharp recovery shown in the second quarter. In fact, there was another fall.

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The Japanese government is trying to encourage the country’s companies to increase the amount they invest. This is like trying to push water uphill. Japan as a whole and in terms of business already invests too much.

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