This content is from: Portfolio
Five Questions for Eric Lascelles
The U.S. has maintained its productivity edge over other industrial nations, and that could lead to a stronger-than-expected economic recovery, says RBC Asset Management's chief economist.
In 2009, during the depths of a global credit crisis and recession, the U.S. was by most accounts flat on its back. That year, GDP was down 2.5 percent and the labor sector contracted a shocking 6 percentby far, the steepest annual drop of any industrialized country, and twice as big as the declines in Germany, Canada or France, according to Eric Lascelles, chief economist at RBC Global Asset Management.
Even then, however, the U.S. economy was outperforming by one important measure; its productivity gains were hugeup 2.5 percent, far, far away the largest gain of any industrialized country in the world. Over the long run, that capacity for productivity growth may help the U.S. economy maintain at least part of its edge over most other countries, according to Lascelles. In his view, the job gains we are starting to see now will flow from the productivity gains over the last few years. At some point, all that cash that companies have saved must go into new jobs, and those new jobs will create the demand for more products. But without the productivity growth, there wouldnt have been as much money to invest. Here are edited highlights of his recent conversation with Institutional Investor contributing writer Steve Rosenbush.
Institutional Investor: Whats the economic outlook for RBCs home market of Canadaand how does it compare to the U.S.?
One thing to keep in mind about the Canadian economy is that it cant truly decouple from the U.S.; nonetheless, there are some important economic differences between the two countries. Canadaand Germany and Australia, for that matterhave come through the last few years with stronger labor markets than the U.S. But one reason for their job growth is that they have lagged at productivity. In time, that could come back to hurt them. Over the long term, productivity growth is the basis for a prosperous society. In this area, the U.S. is still a leader.
In 2009, U.S. productivity grew 2.5 percent, while Canadian productivity grew 0.6 percent and German productivity declined 2.4 percent. In 2010, the U.S. outperformance was even larger4.0 percent, compared to 1.3 percent in Canada and 1.4 percent in Germany. U.S. productivity led all industrialized nations except Japan, where productivity grew 4.9 percent. U.S. productivity grew at more than twice the pace of productivity in France, the U.K., Belgium or Norway. In Australia, productivity declined 0.1 percent last year.
What exactly do you mean by productivity; and why does the U.S. still seem to excel in this area?
I really just mean output per hour, and getting more output out of fewer employees is one way to juice productivity. As for what accounts for the obvious national differences, it is hard to say. Over the long run youd expect productivity levels to converge, and it is hard to fathom the U.S. just ripping ahead forever. But for now, the U.S. has managed precisely this. As to why, some is attributable to greater labor force flexibility in the U.S., so firms were able to lay workers off more easily during the downturn.
It is more mysterious why they havent hired more on the way back up. Some relates to a geographic mismatch, some to a sectoral mismatch. In other words, some Americans are stuck in their underwater homes and so unable to move to stronger job markets. Others are trained up in construction and manufacturing, neither of which is likely to be where new job creation comes from. There are usually at least short term gains to be had from squeezing the existing workforce. The big question is whether the trick can be repeated.
But the U.S. labor market is much weaker. Is that the trade off for stronger productivity?
Yes, it seems to be. The U.S. unemployment rate in November was 8.6 percent, compared with 7.4 percent in Canada in November and 5.5 percent in the U.K. in October. The only major industrialized country with a higher unemployment rate was France, which had a 9.8 percent rate in October. The U.K. was close, however, with an unemployment rate of 8.3 percent this summer. Even still, European countries tend to have higher unemployment rates, so the U.S. is the most distended relative to its usual position.
Havent those gaps narrowed in 2011?
Yes, in 2011 productivity in the U.S. is tracking growth of only 0.5 percent, compared with gains of 0.3 in Canada and 1.4 percent in Germany.
I think U.S. firms are beginning to bump up against their productivity limits, although gauging this precisely is difficult. Even still, I suspect the U.S. has the better scope for productivity gains over the long term.
Going forward, which economy has the greatest potential for growth?
These are rough estimates, but over the coming decade we expect something on the order of 2 percent GDP growth in Canada, with labor market growth of about 0.75 percent. The U.S. forecast is for 2.5 percent GDP growth, and 1 percent labor market growth. The forecast for Germany is for 1.75 percent GDP growth and 0.5 percent labor market growth. The U.S. economy may grow a bit faster, given its tendency toward stronger productivity growth and faster labor force growth.