Why The US Has Higher Productivity
Good morning. Today I want to talk about the U.S. economy in comparison, to other economies and, why it's performing, the way it is. The documents I will refer to are first the IMF, outlook, which is, come out in the last two weeks. That gives us some international comparisons.
For the US economy I use, the monthly outlook from Standard and Poor's, which is, the number one rated by the Congressional Budget Office, well ahead of other economic forecasters. For the US economy, both the IMF and, Standard Poor's agree that growth this year should be 2%. Our own model of the US economy, based on the Chicago Fed National Activity Indicator, is also forcasting US growth of 2%.
Still, that's 2% is less whatever the negative effect is from, from the US shutdown. When the shutdown continues for a month, that growth rate falls from 2% down to about 1.8 % 1.7%. So it's a moderate slowdown. Still growth in the U.S. economy accelerates next year to about 2.2%. I'll talk later on where that growth is coming from.
When we look at growth in other areas we see that: Euro area is miserable. Great Britain is growing faster than the Euro area now. This year the UK should grow by 1.3% but, the Euro area should grow by about 1.2% this year. Euro area growth drifts off to an even more miserable 1.1% next year. But fortunately, that generates a lot of savings to invest in other countries like us. Those savings then go in to the US equities and bond markets and, the Australian stock market and places like that.
China is slowing down to 4.8% this year and 4.2% next year according to the, IMF. Still, heroically India, marches on to 6.6% growth this year and 6.2% next year. For emerging markets, which include the Indo Pacific generally ,Growth is proceeding at about 5.2% this year and 4.7%, next year.
The U.S is still, pretty good in comparison. This year, it's, growing at 2% or, depending on the results of the shutdown. Next US Growth accelerates, to 2.2%, and growth is then about the same the year after.
There's been a lot of debate this year about the effect of tariffs on the US inflation. In spite of higher tariffs , US inflation is stubbornly , stubbornly low. Headline inflation, which includes food and energy this year should be only 2.8%. Hardly something to scare markets. And that continues a 2.9% next year and 2.5% the year after. Amazingly,US core inflation is a bit higher than that 3% this year and 3.3% next year. It's just that food and energy prices are falling in the US. Why can't that happen here?
Lets look at one of the reasons that you get really quite steady growth and relatively low inflation in the US The comparison I want to make here is between US output per hour and Australian output per hour. In the beginning of this year, we had a shocking slowdown in productivity growth because our government decided that was better to hire more, people from the public service than generate employment in the private sector. It is well known that, productivity in the market economy grows much faster than in the, than in the public sector. So, for the first quarter, productivity in Australia grew, or output per hour worked per annum ,grew by 0.3% . The RBA has told us that, they expect output per hour that will rise to about 0.7%per annum , the same as the UK. And we'll be able to maintain productivity growth rate of 0.7%, going forward.
Let's compare that to what's happening in the US economy. This year It looks like the US will be producing labour productivity much higher than the Australia. US Output per hour should grow by 1.6% this year . Next year US Output per hour may grow even more by, 2.1%. Following that US labour productivity the year should grow between 1.6 and 1.7%,. This is full 1% faster than, the Australian economy is expected to grow in terms of productivity. Remember, it's growth and productivity which generates increase in living standards.
There's two reasons, that we can provide for why the U.S., productivity is growing so much faster than ours. One is a flexible labour market. It's an extremely flexible labour market in the US. The current Australian government has made our labour market less flexible, less than it previously was. A second reason is deregulation . The program of deregulation by the US administration is making it easier for business , to do business.
That, of course, in turn generates higher levels of business investment. That higher level of business investments creates more growth. So, it's a series of policies which are different in each country . The result will be that, living standards in, in the U.S are going to start going to be growing significantly faster than they are in Australia.
And that's the end of the good news for the day.
