Part of the high market sensitivity is also stemming from the higher uncertainty over the outlook for inflation. Without the assumption of gravitational forces bending inflation back towards an “objective” equilibrium or a central bank’s target, the current pulse in inflation becomes a patch that is more likely to persist for longer. Shorter-term trends thereby get a bigger weight in the expectations that build in investor’s minds as future inflation scenarios are less anchored by model outcomes. And market prices are nothing else than the collective imagination of all of us: investors that aim to win a massive forecasting competition. And to win in the current uncertain environment, a faster understanding of the future path of inflation is a furious weapon.      

Next to inflation, the direction that productivity growth will take is probably the most important swing factor for markets. The nominal side of the economy is crucially important to help rebalancing and stabilizing our economic system (and supporting nominal asset prices!), but the real and sustainable gains in prosperity are driven by productivity improvements. It is thereby also what influences the level that central bank rates can reach, the pace that profits can grow and the extent to which final demand can expand on a durable basis. That all matters a lot to markets. 

And to complicate matters for markets, they are at least as much in the dark on the future of productivity growth as they are on inflation. And if both economists and investors are honest about it, it’s probably not even a new sense of oblivion. Basically, we have a pretty good understanding of the factors that influence productivity, like technological innovation, capital deepening, human organisation around and application of technology and the enthusiasm of consumers and firms to embrace new products and services. We have very little understanding however of the complex interactions between all these forces and in which way they eventually translate into observable productivity gains. 

Currently we are again living in an age full of much discussed and very visible technological change. The digital revolution has changed both our private and professional life styles and the talk about robotics, A.I. and machine learning is everywhere. But yet again, not in the productivity numbers.

The graph below shows very clearly how productivity growth has slowed to multi decade lows over the last 10 years. And although the graph is about the US economy, this is observed in almost all developed market economies.