Stephen Roach on German and Japanese Productivity Growth

by: Stephen Roach

Excerpt from Morgan Stanley economist Stephen Roach's October 2nd essay:

As I travel the world, I sense something big is brewing in the mix of industrial world economic activity. Four years ago, there were whispers of revival in Japan. They came mainly from the business sector, where a massive restructuring was gathering momentum. Anecdotal at first, these reports turned out to be an accurate portent of a stunning turnaround to come in the Japanese economy. Today, there are similar whispers in Germany. I have been to Germany twice in the past three weeks, and in meetings with a wide range of German business managers, the verdict was nearly unanimous — a powerful restructuring is now bearing fruit. Like the case in Japan a few years earlier, this could well be the start of a reawakening in the world’s third-largest economy.[...]

Trends in GDP growth don’t tell the full story. Beneath the surface, something important is stirring on the productivity front in both economies — for my money, the ultimate arbiter of an economic turnaround in any nation. Japanese productivity growth averaged 2.1% over the 2003-05 period — nearly double the 1.2% trend over the 1995 to 2002 interval. There has also been a pickup — albeit more recent — in German productivity; output per worker has expanded at a 1.7% average annual pace in the five quarters ending mid-2006 -- more than double the anemic 0.7% trend from 1998 to 2004. The improvements in Japanese and German productivity mirror a comparable trend that has been evident in the US for a much longer period of time — a 2.8% average annual increase over the 1996 to 2005 period, or a doubling of the anemic 1.4% trend recorded over the 22-year 1974 to 1995 interval.

Undoubtedly, a portion of the recent improved productivity growth in both Japan and Germany is traceable to a cyclical, or transitory, acceleration in economic activity. Some of that cyclical impetus will be unwound if, in fact, aggregate economic growth slows in both economies in 2007, as we are currently forecasting. Yet history suggests that an adverse shift in the cyclical climate could well turn into an opportunity. In studying corporate restructuring for now close to 20 years, my experience tells me that once the business sector gets religion in facing up to competitive challenges, cyclical pressures in operating conditions invariably lead to an intensification of cost cutting and other forms of restructuring. The US is a case in point: Corporate restructuring began in earnest in the first half of the 1980s, but it wasn’t until the mild recession of the early 1990s that those efforts intensified and finally bore fruit in the form of a powerful and sustained productivity revival beginning in the mid-1990s.

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