Productivity growth is in a funk. We delve into the reasons, lay out three scenarios and assess their likely impact on monetary policy and asset prices.

Financial markets tend to fixate on the latest economic data release or the next central bank move. Our new publication takes readers away from the chatter, takes a step back, and details the implications of the global productivity slowdown on monetary policy and asset prices.

Labor productivity has slowed sharply around the world. Why does this matter? Productivity is the key driver of potential growth rates and living standards in the long term. The tables below summarize our findings, which are outlined at length in Productivity Slowdown Puzzle.

Productivity scenarios

Structural Slowdown Cyclical Rebound Measurement Error
Description Productivity growth remains sluggish; economists downgrade their estimates of potential economic growth. Productivity growth returns to historical averages. Companies boost capex as uncertainty over policy and growth outlook ease. Official statistics understate the benefits of innovation — and underestimate productivity
Policy
  • Rising inflation leads the Fed to hike rates sooner — and at a faster-than-expected pace...
  • ...but lower potential growth points to a lower peak rate.
  • Tepid inflation leads the Fed to raise rates at a gentler-than-expected pace...
  • ...but higher potential growth points to a higher peak rate.
  • Fed policy is unchanged in the short term
  • Investors should anticipate potential for higher future GDP growth — and a higher peak federal funds rate.
Bonds
  • The yield curve flattens.
  • Breakeven inflation rates rise as wage growth accelerates.
  • Credit fares poorly on rising rates and declining margins
  • The yield curve steepens.
  • Breakeven inflation rates fall on soft wage growth.
  • Stronger growth expectations support credit markets.
  • The yield curve steepens.
  • Breakeven inflation rates fall on soft wage growth.
  • Credit outperforms U.S. Treasuries as the economic growth outlook improves.
Equities
  • Equity markets fall on expectations of lower growth and profit margins.
  • Cyclical sectors such as industrials and IT underperform.
  • Equities gain as higher productivity and loose policy support earnings.
  • Cyclicals such as industrials and IT outperform; steep yield curve helps financials.
  • Equity markets get a modest boost.
  • IT sectors outperform as better data confirm robust productivity growth in the sector.

Market implications

Short-term rates Long-term rates Breakeven inflation Credit spreads Equities
Structural slowdown
Cyclical rebound ◀▶
Measurement error ◀▶ ◀▶ ◀▶

Source: BlackRock Investment Institute, January 2016. For illustrative purposes only.

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2016 Investment Outlook

BlackRock Investment Institute: 2016 Outlook

The monetary policy cycle has dominated markets for years. As the global liquidity tide crests, the business, credit and valuations cycles should gain in importance. Here’s our roadmap for 2016.

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