Monday morning and the market's attention is fixed squarely on Wednesday's FOMC meeting where Jay Powell will make his debut as Fed chairman. Expectations ahead of the event include a near-certain rate hike and also that Powell will lean as hawkish as possible to optimise his room for manoeuvre in future policy setting.
Article / 19 March 2014 at 9:57 GMT

Why world markets are in a state of flux in 2014

Chief Economist & CIO / Saxo Bank

•  Innovation  in danger of stagnating
  Small and medium-sized businesses deserve greater support
•  Access to financing and technology is main driver of long-term growth

This may be one of the most boring and data-driven notes from me ever (yes, I know, what's new?)  but it’s probably one of the most important in terms of understanding the present economic conditions, which I have coined: 2014 – A state of flux

Productivity and demographics remain the two most powerful drivers of our economic model. It’s almost assumed we can always keep growing despite both the mathematically and practical limits to that concept. But how well are we doing in the one factor that has “saved” us in the past: new innovation and technology?

There are two major reports out:  The Conference Board – 2014 Productivity Brief – Key Findings  (Financial Times note on the report here) & Economic Report of The President in which Chapter 5 deals with productivity. Both have bad news for you:


Source: The Conference Board Total Economy Database, January 2014

Chart online:

The trend is very clear — innovation/technology is reversing dramatically down in emerging markets, which of course explains the dramatic negative return on investment experienced in China and the rest of Asia.

Of greater concern is the long-term trend of the mature economies. An easy, and probably too easy, assumption would be that we have not "really" invented much since the 1970s. There could be measure problems with a big data economy but aligning this chart and the sub-par growth the world is experiencing — under the easiest monetary conditions in history — does, however, prove a point. The world is locked at lower rates unless we initiate and support innovation and technology use.

The problem as I have often said, is that under the Bermuda Triangle of economics model pursued by policy makers, 20 per cent of the companies listed on the global stock market get 90 percent of all credit and 95 percent of political capital. The  SMEs that comprise 100 percent of all private sector job growth get 10 percent of credit and 5 percent of political capital. Failing to understand these numbers will only make the above chart and trends worse, not better.

The world is in dire need of abolishing big business support, and focus on SMEs instead. This would even have the added advantage of reducing the inequality as QE and QQE support directly the top 1 percent of the population relative to middle class and lower income.

The President report, of course, is less negative but using their own charts I think you will get the point:


This shows how 52 percent of productivity since World War II is driven by “innovation/technology” — and how labour itself only directly adds 10 percent while using more capital production increases productivity by 38 percent. Therefore, again, access to financing and technology is the main driver of long-term growth. The lesson should be simple yet every government in the world fails to act on this.

This chart shows overall non-farm productivity and multifactor productivity side by side. Again, there is some push from investment in tech/innovation.

Source: Bureau of Labor Statistics. Productivity and Costs, Multifactor Productivity

The San Francisco Fed does a “real time” time series although it's relatively late to market:


Finally, my inspiration to look at productivity came from reading this excellent blog: Conversable Economist, Timothy Taylor: The US Productivity Challange

Timothy has a number of conclusions:

Source: National Science Foundation, National Patterns of R&D Resources

Solidus Solidus
Good article. Maybe investments in R&D were reduced as a wealth effect was produced by deregulation and expansion of credit. Now that option is closed. I have a long experience in R&D for a major company and the management and economists have destroyed the innovative culture that was once there. I think this is true for many big companies. A rethinking has to take place to foster growth.


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