It’s productivity, stupid.
European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation.
Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the eurozone – as measured by workers’ output per hour – have fallen significantly behind the US in the wake of the financial crisis, with growth falling from 2 per cent to 0.5 per cent in recent years.
Raising productivity is vital to boost future economic growth, improve living standards, and help ease the burden on government public finances. Weak output per hour has also plagued the UK and the US since 2009, posing a major headache for economists who have sought to explain its decline.
Mr Draghi attributed weak productivity growth to non-manufacturing firms’ poor ability to absorb technological changes to improve their efficiency – a situation made worse by weak competition in many sectors.
Should governments fail to undertake reforms to lift productivity, encourage business innovation and liberalise labour markets, he warned income growth in the single currency area “is likely to stagnate and may even decline”.
Ahead of a key ECB meeting next week, the Italian central banker said policymakers were taking action to ensure that low interest rates do not become a permanent feature of the eurozone economy, “but we alone cannot eliminate that risk”, he said.
“Monetary policy is providing support and space for governments to carry out necessary structural reforms. It is up to euro area governments to act, individually at national level as well as jointly at European level”, he said.