Eurozone productivity is picking up, according to Morgan Stanley economist Eric Chaney. In a recent note to clients, he concluded:
One thing has escaped analysts' attention since the beginning of the year (for lack of official statistics): labour productivity has significantly accelerated in the euro area. On our estimates, hourly productivity has increased by 2.4% (annualized rate) in the first half of the year, compared with 1.3% since 1999. I believe that the resurgence of productivity is not merely cyclical: restructuring is intensifying as a result of globalization, and companies are reaping the benefits of consistent investment in information technology.
Today's FT Lex column has a summary of the European productivity story:
Are European workers turning into swots? Although the quality of the statistics is notoriously poor, productivity appears to have accelerated significantly. Productivity per worker in the business sector grew on average by 0.7 per cent a year from 1999 to 2005, according to official estimates. Morgan Stanley reckons this has speeded up to a 2 per cent annualised rate in the first half of this year. Short periods of data must be interpreted with caution, and it is difficult to disentangle cyclical and structural effects. Nevertheless, it is possible to identify some significant changes in productivity that may be sustainable for a number of years.
First, through investment in information technology, Europe appears to be narrowing the “innovation gap” with the US. Second, corporate restructuring has led to more efficient working practices. But the most important explanation may be developments in the labour market. Flexible, particularly part-time, employment has grown. Meanwhile, some full-time workers, such as those at Siemens, have agreed to work longer hours without full compensation. Both trends mean the rate of decline in aggregate hours worked appears to be falling.
One implication of higher productivity growth would be to narrow the gap between European and US productivity – estimated at 10 per cent in 2004. Revisions to the US data have led economists there to revise down estimates of trend productivity growth to 2.5 per cent in the non-farm business sector. As a result, estimates of non-inflation generating growth in gross domestic product have also been revised down, to 3 per cent or lower.
In Europe, if the productivity improvement is sustained, estimates of the non-inflationary growth rate should be raised. This will present the European Central Bank with a dilemma. If Europe can grow faster without generating higher inflation, easier money may be justified. But the ECB is justifiably sceptical of productivity data and wants to keep up the pressure on governments to pursue structural reform. Lower interest rates are no closer.
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