New technology and long-term economic growth
A look at the effect of technological change on the global economy and labour force.
Over the past 200 years, the global economy and labour force have proved remarkably good at adapting to disruptive technology, but the current wave of technological change is marking out new territory.
Today, workforce automation and artificial intelligence (AI) are automating brains as well as brawn, advancing at unprecedented speed and scale across many parts of the economy simultaneously. As a result, we cannot assume that displaced workers can be rapidly or easily redeployed to new functions as they were in the past, with profound implications for economic growth and the labour force.
Optimistic on productivity
Despite promising technological advances, productivity growth seems to have stalled since the financial crisis, leading many experts to reduce their optimism for future growth in both productivity and GDP. We don’t believe productivity’s heyday is behind us. Instead, we see it experiencing a lag effect over the next 10-15 years, similar to the pattern seen with 20th century innovations, where productivity growth often coincided with widespread adoption of specific breakthroughs.
Long-term growth impact more complex
Estimating the impact of automation on trend GDP is more complicated, due to uncertainty over whether rapid adoption can deliver rising wages and rising productivity concurrently.
Moderate estimates suggest a reasonable upper bound to world GDP gains from automation of 1-1.5 percentage points by 2030, but only if displaced workers are efficiently re-employed elsewhere in the economy. Driverless cars offer a prominent example. If half of the nearly 5 million U.S. jobs in the ground transportation sector are automated over the next 20 years, and those displaced workers are redeployed at average productivity, the incremental boost to U.S. GDP would be almost 0.1% from that innovation alone.
Aging nations such Europe and Japan may benefit from an additional boost to trend growth rates as automation offsets shrinkage in the labour force, narrowing the spread of growth rates across developed economies.
Reskilling key to upside
Given the scale, speed and spread of change, it’s clear that human skills must keep pace for economies to benefit from automation. Although routine physical jobs that can be fully automated remain at highest risk, many non-routine, non-physical white-collar jobs will also be affected going forward. The least vulnerable will be jobs requiring more ‘human’ interpersonal skills and expertise, such as we see in areas such as sales, communications, creative arts, culture, health care and management.
Government response matters
Government will play a fundamental role in preparing the labour force for the new era of automation, through policies on education and training, and tax incentives for business investment in human skills. Spreading economic gain more evenly will be equally important for social and political stability, and, crucially, to protect consumer purchasing power. Given the potential for more consumers to be out of work or facing lower salaries, growth in consumer demand in line with productivity cannot be taken for granted.
To balance these needs, we expect governments to avoid extreme policy in any direction. A pure laissez-faire approach risks persistent wage pressure and swelling populism, while excessive redistribution risks capital flight.
Muted early economic effects
Despite the early stage of adoption of automation and AI, we believe we will start to see the impact of productivity gains on asset returns and equilibrium interest rates over the next 10 – 15 years, but to a limited degree.
If the productivity boost of 1 – 2 percentage points predicted by a range of studies materialises, and technology effectively offsets population decline in some developed nations, we could see annualised developed market growth and equity returns more than a full percentage point higher than currently assumed in our Long Term Capital Market Assumption (LTCMA) forecasts. Moreover, the dispersion in equity return between developed and emerging markets has scope to narrow meaningfully.
The effect on equilibrium interest rates may be more nuanced, however, as the offsetting forces of increasing productivity pushing up growth, and decreasing labour bargaining power pulling down inflation, hold yields in line with current forecasts.
Investible technologies today
Despite the muted economic impact of technology over our LTCMA time horizon, we believe the groundwork is being laid for more substantial impact in the long-term. Based on the early effects on the world economy, we believe five areas of technological change offer investment potential today:
Cloud computing - delivering substantial cost savings and fuelling a wave of disruptive start-ups by offering ubiquitous, flexible and on-demand access to shared computing resources.
The Internet of Things – generating new business models and improving inventory control by connecting people, processes and physical non-computer devices to the internet.
Artificial intelligence – enabling machines to perform a wider range of tasks across sectors ranging from transportation to health care and financial services.
Robotics – transforming retail and manufacturing operations through widespread automation, leading to increased productivity and competitiveness.
Blockchain – revolutionising transaction costs and contract management and enforcement by automating transaction settlement and recordkeeping.
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