Photographer: Brent Lewin/Bloomberg

How Financial Vulnerability Helped to Curb Global Productivity

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  • The slowdown has roots in leverage ratios, credit conditions
  • Crisis-era rollover risk also cut intangible investment

Productivity has slumped the world over, and credit conditions might be at least partly to blame. 

That's the first finding we outline in this week's economic research wrap, and it's an important one: economists have been scratching their heads for years about why efficiency improvements have slowed so much, and this might explain as much as a third of the pullback.

We also take a look at millennial homeownership, the hollowing out of the middle class in advanced economies, and the future of digital currency at central banks. Check this column each Tuesday for a synopsis of new and interesting studies from around the world. 

Credit conditions dragged on productivity

We can add financial conditions to the list of plausible explanations for the global productivity slowdown. New International Monetary Fund research finds that companies with a lot of leverage or a lot of debt maturing during the crisis era saw a larger total factor productivity slowdown than their counterparts on firmer financial footing.

What's more, the pullback was worse in countries where credit conditions tightened more right after Lehman Brothers collapsed in September 2008. Balance-sheet vulnerable businesses cut their intangible investment, such as research and development and workforce training, which in turn slowed their efficiency improvements. On average, these trends could have accounted for about a third of the post-crisis slowdown in productivity growth, the researchers write.

Financial Frictions and the Great Productivity Slowdown
Published May 31
Available on the IMF website

Renting is staying in style

America's largest generation should be in good shape to underpin growth in homeownership: An index of home affordability for young adults is above historical averages, by Bank of America calculations.  Yet millennials still aren't buying. Down-payments and student loans may be standing in their way, and tighter credit standards could be another barrier. Also key, though, is a major shift in their habits and lifestyles. 

Today's young adults spend more on health care and household operations, and they're getting married later -- delaying one of the major life events that triggers homeownership. What's more, they've moved into city centers, where renting is more common. "We don't expect these dynamics to change in the medium-term which should translate to a lower equilibrium pace for single family housing starts," economists Michelle Meyer and Alexander Lin write. 

Is it cool to buy a home?
Published  June 1
Available to Bank of America clients

Middle-class decline isn't a simple story

Advanced economies have seen their middle classes hollow out in recent decades, and two theories are often floated to explain the ongoing trend. On one hand, expanded global trade and investment mean that workers are competing against labor from around the world. On the other, technological advances are pitting workers against robots. In a new report, the Organization for Economic Cooperation and Development says they should be taken in conjunction to explain middle-class decline.

As global competition becomes fiercer, it pushes companies to find efficiencies to ensure their own survival, leading toward outsourcing and mechanization. Companies that fail to adapt see productivity fall, especially in the materials and industrials sector. "These heterogeneous within-industry outcomes lie at the heart of worker disgruntlement with their rapidly changing world,'' according to the annual Business and Finance Outlook.

OECD Business and Finance Outlook 2017
Published May 30
Available on the OECD website 

Is blockchain in central banks' future? 

The emergence of private digital currencies like Bitcoin has drummed up interest in a related idea: could central banks create digital currency, and if they did, would those also be based on distributed ledger technology? 

A new Bank of England blog post tackles the second question. With Bitcoin's distributed ledger technology, there's no reliance on one central party to maintain records: instead, data is shared, replicated and synchronized. In the case of a central bank-issued currency, "the presence of at least one trusted central party (the central bank) means that many of Bitcoin’s design features would be neither necessary nor desirable," Simon Scorer writes. There are also cybersecurity issues with the practice, though it might offer resilience benefits: having data distributed means that there's no single point of failure if something goes awry.

The post is a good primer on an issue that's sure to remain on central bankers' minds. For more on the topic, check out Fed Governor Lael Brainard's October 2016 speech on distributed ledger technology. 

Central Bank Digital Currency: DLT, or not DLT? That is the question
Published June 5, 2017
Available on the Bank of England website

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