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Prospects for long-term productivity growth

Author

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  • Ben Deboeck

Abstract

Since the number of people at working age will begin shrinking in the coming years, demographic ageing will impose a permanent drag on economic growth in the euro area. As a result, growth will critically depend on labour productivity. Developments in total factor productivity (TFP) particularly matter, since they reflecthow technological progress allows for a more efficient use of labour and capital. However, TFP growth in the euro area has fallen back to the lowest levels in a very long period. The latest figures point to a sluggish medium-term outlook. Views on the long-term outlook for productivity growth differ. A more optimistic view considers that TFP growth will unavoidably rebound once new ground-breaking technologies mature, complementary investment and organisational changes are made and the necessary new skills acquired. However, technology diffusion has fallen because of the rising importance of intangible capital and higher market concentration, all of which deter innovation. Therefore, a return to historical TFP growth rates seems a tall order under current policies. A more downbeat view concludes that, aside from a transmission problem, innovation has become simply less transformative. As a result, productivity growth has reversed to its long-run trend and we should not expect a permanent return to a higher growth path. In addition, the cautious view points to rising structural headwinds, such as global fragmentation, climate change, demographic ageing and rising government debt, all of which might add to the downward trend in productivity growth.

Suggested Citation

  • Ben Deboeck, 2023. "Prospects for long-term productivity growth," Quarterly Report on the Euro Area (QREA), Directorate General Economic and Financial Affairs (DG ECFIN), European Commission, vol. 22(1), pages 31-42, May.
  • Handle: RePEc:euf:qreuro:0221-03
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