How to Invest in a Low Growth World (Part 2 of 2)

"Computing power can be expected to double every two years as a result of increases in the number of transistors a microchip can contain."
- Moore's Law

The devil’s advocate

Do you recall that, in part 1 of this Absolute Return Letter, I argued that GDP growth will remain painfully low for many years to come unless we can somehow get productivity growth flying again? The argument was based on the simple fact that, at the most fundamental level, there are only two drivers of GDP growth (a view that I will actually challenge later in this paper), and one of the two – workforce growth – has started to shrink in many countries and will continue to do so for many years to come.

In the second part of this paper – the one you are holding in your hands now – I will zoom in on the other basic driver of GDP growth – productivity growth – and I will ask two very simple questions: In the digital age, does it really matter that the workforce will shrink? Won’t robots just replace humans in the work process?

Before having a shot at those questions, please allow me the joy of playing devil’s advocate for a minute or two. Think back to the mid-1990s and think of this wonderful new gadget called the internet which was only made possible because of a new technology called digitisation.

Now, look at the impact digitisation (more so than the internet) had on productivity growth. The ten years from the mid-1990s to the mid-2000s have gone down in history as one of the fastest growing ten-year periods ever as far productivity is concerned, and the reason is simple - productivity growth exploded as a result of the first wave of digitisation. Fast productivity growth led to robust GDP growth, even if workforce growth had already started to slow in many countries, but productivity growth slowed again and has been rather pedestrian since the mid-2000s (Exhibit 1).

We are now in the early stages of the second wave, and rarely a day passes by without me asking myself why productivity growth is so ordinary in the midst of the digital revolution. How come advanced robotics, AI, smartphones, blockchain, IoT, driverless cars and other new disruptive technologies have had nowhere near the impact on productivity that everybody expected? In the following, I shall do my best to answer that question.

Exhibit 1: Compound annual growth rate of real GDP per hour worked
Source: “The Productivity Paradox”, Oxford Martin School


Before I begin to untangle that mystery, allow me to mention ARP+ again. As you may recall, we launched it earlier this year in response to new and tighter regulations as to what we can and cannot share with you in the Absolute Return Letter, assuming we don’t charge for it (which we won’t).