INTERNATIONAL
America Inc's productivity boom may be going global
AI investment is lifting productivity as firms produce more with fewer workers, raising both optimism and concerns for global growth. - FREEPIK
ORLANDO, Florida: THE rumblings of a productivity boom are reverberating through the U.S. economy – and they may be going global.
AI Brief
Technological leaps have long been the hallmark of U.S. economic efficiency, flexibility and dynamism – trends that artificial intelligence is expected to accelerate – but there are nascent signs that the benefits of AI may be spreading.
Purchasing managers' index (PMI) figures on Friday showed that British business activity has started this year on a strong footing, with robust demand at home and abroad spurring the fastest output growth since April 2024.
Firms also noted a solid decline in employment, with the pace of job losses accelerating from December. Britain's PMI employment sub-indexes have been below the threshold separating expansion from contraction since late 2024.
Britain, therefore, appears to be producing an increasing amount of goods and services per hour worked – the textbook definition of productivity growth.
A similar, although grainier, picture also emerged from Germany's latest PMI figures. Output in January was the highest in three months, while employment fell at the quickest rate since November 2009, excluding pandemic-related declines.
To be sure, PMI data don't always fully chime with official growth and jobs statistics, and one should never put too much stock in a single month's figures.
But that doesn't mean the burgeoning trends should be disregarded. As JP Morgan economist Allan Monks notes, the ratio of output to employment in the UK - a crude proxy for productivity - is the highest since August 2013, excluding pandemic period distortions.
Morgan Stanley's Bruna Skarica concurs, writing: "A degree of skepticism around the PMIs is probably warranted, but the dynamic of resilient growth and sluggish labour demand merits more attention."
LONG-TERM OPTIMISM
What's driving this? In short, it's likely the AI and tech frenzy. Firms are going all in on the bet that AI will make their businesses more productive, innovative, and cost-efficient.
It remains to be seen whether the AI revolution will enable the rest of the world to narrow the productivity gap with the United States, however.
In China, this seems like a safer bet. The world's second-largest economy is already enjoying significant productivity gains in certain sectors like autos, steel, and high-value manufactured goods.
What's more, computing capacity in China is beginning to pull ahead of the U.S.'s and is expected to essentially double in the next five years, economists at Goldman Sachs reckon.
But it's a different story in Europe, often seen as a weak link in the global value chain, suffering from low potential growth and productivity. Economists blame this on limited innovation in technology, over-regulation, high levels of public debt and low private investment.
Goldman Sachs' economists estimate AI-driven productivity gains will add on average only around 0.05 percentage points to European growth in the next few years, rising to a "more meaningful" 0.2 pp per year after 2030.
But that is still only half the 0.4 pp of AI-induced productivity gains to annual GDP growth the U.S. is expected to enjoy.
PRODUCTIVITY A 'GET OUT OF JAIL FREE' CARD?
Federal Reserve Chair Jerome Powell in December signaled that productivity growth could help the central bank reduce inflation while maintaining a "dovish" policy bias to support the labor market and economic growth.
Faster productivity is disinflationary. If productivity gains speed up and spread globally, central banks could potentially avoid having to make dramatic interest rate changes while still hitting their inflation targets.
Yet, the flipside is that maintaining full employment could become more challenging if AI advances allow economies to flourish with far fewer workers. Powell may have more to say on this when the Fed meets this week.
Of course, all of this should be taken with a grain of salt. Productivity figures are dubious at the best of times and hard to measure accurately. If the underlying data are flawed, as Britain's Office for National Statistics labor market numbers were revealed to be last year, so too are productivity assumptions.
But trillions of dollars of global AI-related spending is expected to come down the pike in the coming years, and investors are betting this will deliver a productivity surge. The release of earnings from U.S. tech megacaps including Meta, Microsoft and Apple this week may offer some insight on this.
It's obviously too soon to know if the AI spending will deliver a sustained economic boost globally, but – for perhaps the first time since the frenzy began – there are signs that it just might.
AI Brief
- UK and German PMIs show rising output alongside falling employment, hinting at early AIdriven productivity gains.
- Analysts say firms are betting heavily on AI to boost efficiency, though Europe may lag behind fasteradopting economies like the US and China.
- Higher productivity could ease inflation pressures, but widespread AI use may challenge full employment and make job markets more fragile.
Technological leaps have long been the hallmark of U.S. economic efficiency, flexibility and dynamism – trends that artificial intelligence is expected to accelerate – but there are nascent signs that the benefits of AI may be spreading.
Purchasing managers' index (PMI) figures on Friday showed that British business activity has started this year on a strong footing, with robust demand at home and abroad spurring the fastest output growth since April 2024.
Firms also noted a solid decline in employment, with the pace of job losses accelerating from December. Britain's PMI employment sub-indexes have been below the threshold separating expansion from contraction since late 2024.
Britain, therefore, appears to be producing an increasing amount of goods and services per hour worked – the textbook definition of productivity growth.
A similar, although grainier, picture also emerged from Germany's latest PMI figures. Output in January was the highest in three months, while employment fell at the quickest rate since November 2009, excluding pandemic-related declines.
To be sure, PMI data don't always fully chime with official growth and jobs statistics, and one should never put too much stock in a single month's figures.
But that doesn't mean the burgeoning trends should be disregarded. As JP Morgan economist Allan Monks notes, the ratio of output to employment in the UK - a crude proxy for productivity - is the highest since August 2013, excluding pandemic period distortions.
Morgan Stanley's Bruna Skarica concurs, writing: "A degree of skepticism around the PMIs is probably warranted, but the dynamic of resilient growth and sluggish labour demand merits more attention."
LONG-TERM OPTIMISM
What's driving this? In short, it's likely the AI and tech frenzy. Firms are going all in on the bet that AI will make their businesses more productive, innovative, and cost-efficient.
It remains to be seen whether the AI revolution will enable the rest of the world to narrow the productivity gap with the United States, however.
In China, this seems like a safer bet. The world's second-largest economy is already enjoying significant productivity gains in certain sectors like autos, steel, and high-value manufactured goods.
What's more, computing capacity in China is beginning to pull ahead of the U.S.'s and is expected to essentially double in the next five years, economists at Goldman Sachs reckon.
But it's a different story in Europe, often seen as a weak link in the global value chain, suffering from low potential growth and productivity. Economists blame this on limited innovation in technology, over-regulation, high levels of public debt and low private investment.
Goldman Sachs' economists estimate AI-driven productivity gains will add on average only around 0.05 percentage points to European growth in the next few years, rising to a "more meaningful" 0.2 pp per year after 2030.
But that is still only half the 0.4 pp of AI-induced productivity gains to annual GDP growth the U.S. is expected to enjoy.
PRODUCTIVITY A 'GET OUT OF JAIL FREE' CARD?
Federal Reserve Chair Jerome Powell in December signaled that productivity growth could help the central bank reduce inflation while maintaining a "dovish" policy bias to support the labor market and economic growth.
Faster productivity is disinflationary. If productivity gains speed up and spread globally, central banks could potentially avoid having to make dramatic interest rate changes while still hitting their inflation targets.
Yet, the flipside is that maintaining full employment could become more challenging if AI advances allow economies to flourish with far fewer workers. Powell may have more to say on this when the Fed meets this week.
Of course, all of this should be taken with a grain of salt. Productivity figures are dubious at the best of times and hard to measure accurately. If the underlying data are flawed, as Britain's Office for National Statistics labor market numbers were revealed to be last year, so too are productivity assumptions.
But trillions of dollars of global AI-related spending is expected to come down the pike in the coming years, and investors are betting this will deliver a productivity surge. The release of earnings from U.S. tech megacaps including Meta, Microsoft and Apple this week may offer some insight on this.
It's obviously too soon to know if the AI spending will deliver a sustained economic boost globally, but – for perhaps the first time since the frenzy began – there are signs that it just might.
The opinions expressed here are those of Jamie McGeever, a columnist for Reuters.
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