Trends Shaping Economic Productivity

The diagram tells a stark story. Since 2014, U.S. labour productivity has risen ↗️ by roughly +16%, while major Eurozone economies have remained largely flat ➡️ Germany (+1.5%), France (+1%), Italy (0%), Spain (-1%). This is not a cyclical blip. It reflects structural divergence. The accompanying report 🔗 https://lnkd.in/dGMjHSJ8 𝑈𝑛𝑑𝑒𝑟𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑡ℎ𝑒 𝐸𝑈-𝑈𝑆 𝑙𝑎𝑏𝑜𝑢𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑔𝑎𝑝 #1 – 𝑇ℎ𝑒 𝑏𝑟𝑜𝑎𝑑 𝑝𝑒𝑟𝑠𝑝𝑒𝑐𝑡𝑖𝑣𝑒, makes the causes clear: 🔹 The U.S. has captured far greater returns from ICT, digital platforms and AI, especially in large service sectors. 🔹 Europe’s fragmented internal market limits scale, diffusion and firm growth. 🔹 Under-investment in R&D and intangible capital continues to constrain productivity gains. 🔹 Weaker scale-up finance, skills mismatches and digital infrastructure bottlenecks slow adoption. 🔹 Post-2008 and post-pandemic investment dynamics have favoured employment growth over productivity growth in Europe. Productivity is ultimately about scale, diffusion and execution — not intent or regulation alone. Without decisive reform in market integration, capital allocation, and technology diffusion, Europe risks locking in a decade of relative stagnation 📉 𝐃𝐚𝐭𝐚 𝐬𝐨𝐮𝐫𝐜𝐞𝐬: Haver Analytics; Bureau of Economic Analysis (U.S.); Deutsche Bundesbank; Insee (France); ISTAT (Italy); INE (Spain). #Productivity #EconomicGrowth #DigitalTransformation #AI #Europe #UnitedStates #Strategy #Competitiveness #LabourProductivity

Over the past several days, three separate data releases are worth considering together. • Nonfarm business productivity increased at a 4.9% annualized rate in Q3 2025, while unit labor costs fell 1.9%. (see my earlier post: https://lnkd.in/guzpCekX) • Analysis from the Federal Reserve Bank of St. Louis estimates that AI-linked investment categories contributed approximately 0.97 percentage points to real GDP growth through the first three quarters of 2025, accounting for nearly 40% of total growth over that period. (see my post from last week: https://lnkd.in/g-XjtSjV) • Inflation continued to moderate, with CPI rising 2.7% year-over-year and core CPI at 2.6%. (In the news today.) Individually, each of these data points has multiple interpretations. Taken together, they suggest something more structural may be occurring. In macroeconomic terms, a sustained technology diffusion should raise potential output (meaning the economy’s capacity to produce goods and services without generating inflationary pressure). If potential output is rising, we would expect to see: • Higher output per hour (productivity gains) • Capital deepening (meaning increased investment in productivity-enhancing equipment, software, and infrastructure) • A relaxation of the traditional Phillips curve trade-off (meaning growth and wage gains can occur with less inflation pressure). Recent data are directionally consistent with that pattern. A near-5% productivity surge alongside declining unit labor costs suggests improved efficiency. AI-related capital formation accounting for nearly 40% of recent GDP growth is a textbook example of capital deepening. And inflation in the mid-2% range indicates that price pressures are not accelerating despite continued expansion. This does not prove AI is the sole driver, nor does it imply uniform gains across sectors. But when improvements show up simultaneously in productivity, investment composition, and price dynamics, it raises the possibility that productive capacity itself is expanding. If so, the relevant question is no longer whether AI is “interesting,” but whether it is beginning to shift the economy’s underlying growth frontier. We may be observing the early stages of that shift.  #AI #Economics #Productivity

Growth in the new economy is entering a new phase. The World Economic Forum’s latest report, Growth in the New Economy: Towards a Blueprint, brings together insights from over 11,000 business leaders and two years of global dialogue to examine how growth strategies are evolving. The conclusion is clear: growth is no longer defined by a single trajectory. It is being reshaped by a convergence of structural transformations. Artificial intelligence, geopolitical fragmentation, rising debt levels, demographic shifts, and the rebalancing of environmental and societal priorities are collectively redefining the contours of the global economy. At the same time, a sustained slowdown in growth and widening economic divides are putting existing growth models under pressure, across both advanced and emerging economies. Geopolitical tensions and supply chain disruptions are increasing uncertainty around long-term growth trajectories. Higher energy costs, policy instability, and skills shortages are emerging as critical barriers, while access to finance and infrastructure gaps continue to constrain lower-income economies. Yet within this complexity, clear patterns are emerging. Growth is shifting geographically. Middle-income economies are expected to account for approximately 65% of global GDP growth by 2030, with Asia contributing more than half of global expansion. Sectoral dynamics are also evolving. Information technology services, advanced manufacturing, and healthcare are expected to be key growth drivers, while traditionally strong sectors such as real estate and chemicals face slower momentum. The report frames the transition through a set of “no-regret” moves and strategic dilemmas that decision-makers must navigate across four key areas: -Strengthening productivity and human capital in an increasingly technology-driven economy. -Balancing global integration with domestic capacity and resilience. -Reinforcing economic fundamentals while redefining the role of government. -Aligning sustainability transitions with long-term economic prosperity. For business leaders and policymakers, the message is not about choosing a single path. It is about managing trade-offs. The organisations and economies that will lead in the new environment are those able to balance competing priorities, innovation and inclusion, resilience and efficiency, short-term pressures and long-term strategy. Growth in the new economy will not be linear. It will be shaped by those who can navigate complexity with agility, while staying anchored in fundamentals. #economy #transformation #organisations

🇪🇺 Europeans often criticise themselves; Americans criticise Europeans even more. The Chinese say little, but likely share the view. Since 2008, two trends fuel the narrative of decline: a widening GDP gap with the US and Europe’s failure to produce major technology firms. The result seems damning—lower GDP per capita today, no innovation engine for tomorrow. Paul Krugman’s analysis fortunately offers a more careful view. The apparent GDP divergence since 2008 is largely a statistical illusion. The euro was unusually strong in 2007–08, then weakened sharply. At market exchange rates, Europe appears far behind. At purchasing power parity, which adjusts for price differences, EU GDP in 2024 stands almost exactly where it was in 2007—slightly lower, not meaningfully so. Currency movements, not structural decline, explain the difference. GDP per capita tells a more nuanced story. France records output per person at 68% of US levels, comparable to Alabama. Yet French conditions differ. French workers are only 11% less productive than Americans. The rest comes from social choices: more holidays and earlier retirement, which account for two-thirds of the difference. They create fiscal pressures but also deliver valued benefits. Life expectancy alters the comparison further. Research suggests a one-year gain in life expectancy equates to a 4–5% GDP rise. The French live nearly five years longer than Americans. Adjusted for this, French GDP per capita reaches about 90% of US levels, not 68%. Americans earn more, but many die before enjoying it! The bigger challenge is Europe’s technology gap. Since the late 1990s, US productivity growth has outpaced Europe’s almost entirely because of technology. Excluding tech, Europe matches US productivity over 20 years. Institutional structures explain much of this. The EU remains fragmented: national rules force firms to adapt country by country, blocking continental scale. Yet the current global cycle presents an opportunity. We are entering the late stage of the current paradigm. Late cycles bring clarity and predictability, lowering barriers to catch-up. South Korea used similar conditions in the 1970s—during the late cycle of oil, automobiles and mass production—to converge with leading economies. Europe now faces a comparable environment in semiconductors, computing and networks. Late cycles also reward different capabilities. The current one requires less venture capital chasing software platforms and more production capital embedding advanced technologies into the legacy industrial base. Europe holds strengths in that regard: skilled workforces, deep industrial finance and relatively intact manufacturing ecosystems, compared to the US. These provide a base to build on rather than a need to replicate Silicon Valley. Europe’s economic position is less dire than assumed, but its long-term path depends on whether it can seize this late-cycle opening in technology. More analysis in my NL Drift Signal.

🏭 As the 2025 Annual Conference of the OECD Global Forum on Productivity (GFP) on 𝘐𝘯𝘥𝘶𝘴𝘵𝘳𝘪𝘢𝘭 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴 𝘪𝘯 𝘢 𝘨𝘭𝘰𝘣𝘢𝘭𝘪𝘴𝘦𝘥 𝘸𝘰𝘳𝘭𝘥 kicks off, it's a good time to ask what the latest trends are in Industrial Policy. The latest OECD data from the Quantifying Industrial Strategies (QuIS) project covering 11 economies between 2019 and 2022 reveals significant changes where governments are spending on industrial policy. Three key findings: 1. Industrial Policy Spending is Growing 📈 Support jumped from 1.40% to 1.55% of GDP over three years, a $4.1 billion increase. Governments introduced 206 new policy instruments but rarely retired old ones (only 1 in 27 discontinued annually). 2. Shift from Sectoral to Horizontal Support 🎯 While sector-specific support remains largest, it declined 10% as governments pivoted toward broader schemes. General business investment support surged 30%. 3. Green Transition Takes Center Stage 🌱 Eight of eleven countries increased green policy spending to 0.27% of GDP on average. Denmark leads at 0.55%, with 79% of green support using direct grants rather than tax incentives. The takeaway: Industrial policy is becoming more prominent, more horizontal, and greener as governments navigate strategic competition and societal challenges such as the green transition. More details in our blog post: https://lnkd.in/e9y-cbWB Read the full policy paper here: https://lnkd.in/eshfnKm2 #IndustrialPolicy #OECD Jerry Sheehan Guy Lalanne Luca Marcolin Luis Díaz Pavez Charles-Édouard van de Put

Imagine a string quartet playing Beethoven. In 1825, it took four musicians 30 minutes. In 2025, it still takes four musicians 30 minutes. No productivity gains. You can’t speed up the music without ruining it. But wages rise over time across the economy, even in sectors with low productivity growth, because: Workers in low-productivity sectors still need to compete for talent. So their wages increase, even if output per worker doesn’t. That creates a cost squeeze. Compare that to manufacturing: In a factory, technology and automation boost productivity. Fewer workers deliver more output. In services? Not so easy. This is Baumol's cost disease and it explains: Why tuition and healthcare costs outpace inflation. Why service-heavy economies (like the U.S.) face long-run cost pressures. Why productivity growth can stall as services dominate GDP. But recent research suggests Baumol’s disease isn’t destiny. As services become more innovation-driven (think: AI in healthcare, edtech in classrooms), they’re beginning to break the disease’s grip. Innovation is finally catching up. For 150 years, we’ve watched innovation shift: 🌾 From agriculture 🏭 To manufacturing 💼 Now, to services. Services were once considered productivity dead ends. Baumol’s cost disease said they’d slow us down. But new research shows service innovation could drive the next wave of growth. Which part of the service economy do you think is poised to lead the next wave of innovation?

As we step into 2026, I wish everyone a year of positivity, resilience, and purpose. The year opens in a context of heightened uncertainty. Geopolitical tensions, economic pressures, and rapid global shifts can feel overwhelming. In moments like this, it matters where we choose to focus our attention. Beyond the noise and the often alarming headlines, data offers perspective. It helps challenge assumptions and point us toward what is actually working. Here are a few signals worth noting, drawn from recent analysis by The World Bank Group, including What the Data Told Us in 2025. The starting point is clear: the jobs challenge is accelerating. By 2050, Africa is expected to be home to nearly one-third of the global workforce, with over 12 million young people entering the labor market every year. This is a powerful opportunity—if economies can create productive jobs at scale. What does the data tell us about how to get there? • Young firms are key job creators. Though few in number, young, high-growth firms account for up to two-thirds of net job creation in developing economies. • Access to finance matters—and real risk should be better understood. Evidence shows that repayment performance in emerging markets rivals that of advanced economies, reinforcing the case for mobilizing private capital. • Local currency finance is expanding. Local currency financing has grown by 56% since 2013, helping firms manage risk and invest for the long term. • Key sectors will shape outcomes. Infrastructure—power, transport, utilities, and information—has outperformed the S&P 500 over six decades, enabling productivity and jobs, while agriculture remains the largest employer across many African economies. • Inclusion continues to unlock participation and productivity. The 73% of women in low- and middle-income economies now hold a financial account, up from 66% a few years ago—progress that must extend to credit and productive finance. Taken together, these signals show that the fundamentals are powerful, real and measurable. As 2026 unfolds, the task ahead is clear: translate momentum into jobs, and opportunity into lasting impact. 📘 Learn more: IFC Economics – What the Data Told Us in 2025 https://lnkd.in/eK4_3RUS http://wrld.bg/5BHm50XQ3eE #IFCinAfrica IFC Africa #JobCreation #EmergingMarkets #FinancialInclusion #PrivateSector

Where is the world’s economy going? The WEF surveyed some of the world’s leading economists and packaged all their insights insights into this report. Here are my key takeaways: 🔸 Global growth is stalling, with advanced economies faring worse than emerging markets. Europe's outlook is particularly bleak. 🔸 Inflation is easing but remains high in many countries. Policymakers face tradeoffs between tightening too much or too little. 🔸 Industrial policy is back in vogue, aiming to spur growth despite fiscal strains and potential market distortions. 🔸 Advances in AI is leading to increased productivity, starting in high-income countries within 5 years. But there are growing concerns about job losses. 🔸 While most sectors could see AI-enabled gains, tech, healthcare and energy are poised to benefit most from geopolitics. 🔸 Consumer sectors, travel and fossil fuels face headwinds from lower demand and the energy transition. 🔸 Businesses will need agility in strategy and operations to navigate the volatility ahead. Talent and technological capabilities will be key. It may be a bumpy ride, but smoother skies could be on the horizon. #EconomicOutlook #GlobalEconomy #Geopolitics #IndustrialPolicy #ArtificialIntelligence #Productivity #Fintech