Some Techno-Optimism

The headlines remain full of negative news about the conflict in Ukraine, a cost-of-living crisis and lingering COVID-related issues not least in China. These factors are derailing consumer and business confidence on the one hand but aggravating inflation tensions on the other. And central banks are accordingly facing an acute dilemma with attendant risks of a policy error extremely high.

One feature of the global economic scene, however, that is arguably receiving less attention than it should concerns the growing desire of companies to invest in new technology and the positive impact from this on productivity growth. As we discuss below the latest dataflow suggest global demand for technology products has been strong, that capex intentions remain firm, and that trends toward technology innovation - and productivity growth - have exhibited ongoing improvements.

On the demand front we can see the evidence for this from surging orders from US companies for capital goods (see figure 1 below) and from surging exports of trade and technology bellwethers such as South Korea and Taiwan (figure 2).

Figure 1: US capex orders continue to strengthen

Figure 2: Global demand for electrical and electronic products has remained firm

That capex intentions remain firm in the technology space can be seen from more recent surveys of US and UK companies and specifically those surveys where that underlying technology detail can be uncovered (see figure 3).

Figure 3: Capital investment intentions in the technology space are strong

On the innovation front we can see this in the ongoing decline in the price deflators for segments of the US information and communications technology space such as information processing equipment and software. The nature of the IT industry has obviously changed markedly in recent decades as indeed have methods of calculating these price deflators. Nevertheless this ongoing price deflation in these areas still stands in vivid contrast to the stagflation era of the 1970s (see figure 4).

Figure 4: Price deflators for information and communications technology continue to decline

Finally on the productivity front we can see this in the US in particular from the dataflow for output per hour worked which has been accelerating in recent years. Even more impressively much of this improvement appears to have been driven by underlying gains in total factor productivity (TFP) growth (figure 5). Data from the San Francisco Fed specifically suggest that business sector TFP growth averaged 4.2% in 2021, its fastest pace for nearly 70 years. Once again this is very different from the productivity environment that characterised much of the 1970s.

Figure 5: US productivity growth has picked up pace in recent years

These capex and productivity positives are obviously at risk of reversal in the period ahead not least because of those issues concerning Ukraine, commodity prices and China. Nevertheless they are a reminder that there are some encouraging positive features of the global economic backdrop that are lurking beneath the surface at present. And policymakers need to be mindful about how these can mitigate the growth and inflation risks that those other issues are otherwise amplifying.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.