US, European and Japanese productivity numbers all ended 2014 on a downward slide – in Japan’s case lower than in the November 2009 – and though there is upwards pressure on wages, growth is being hampered by weak productivity.
As the market readies itself for a Federal Reserve interest rate rise, Ewen Cameron Watt, BlackRock’s global chief investment strategist, issued a caution on the ripple effect that low productivity figures could have on both margins and central bank policy.
“Low productivity feeds into profit margins and central bank policy,” he said. “Employment numbers are rising – in the last 24 months there have been more jobs created in the US than in the previous 10 years, but there is low productivity.
“Heady valuations in some markets and uncertainty over the pace of Fed tightening argue for caution and selectivity in countries, sectors and securities. We balance this with the sense that bull markets often last a lot longer than expected, and the associated risk of missing out on gains.
“Productivity, although not the most immediately sensitive subject, will impact on profits and be pretty constant ‘mood music’ for equity and bond markets over the next quarter.”
Watt cited one of the major drivers of this flagging productivity as a spate of companies accumulating a deficit which is then leveraged up, stemming from what he termed an “undersupply of assets”.
“There is no doubt that companies are borrowing money and leveraging up,” he expanded. “They are doing it on very good cost and duration terms, and on the balance sheets the risk is quite low. But when companies start to leverage up systemically, they are not going to invest so much in products and equipment. The amount spent on buybacks this year exceeds net spending on stakes and capital – this is one of the reasons behind low productivity.
