IN FOCUS6-8 min read

Could technology trigger a lasting boost to productivity?

Increased use of technology helped economies adapt during the pandemic, and could have long lasting effects on productivity. But does it risk reviving populist agendas?



Keith Wade
Chief Economist & Strategist

Two years ago, we identified a series of inescapable investment “truths” that we expected would shape the following decade. Among these truths, we highlighted the accelerated adoption of technology and increased populism as two disruptive trends to watch. But have these two trends been strengthened or challenged by the pandemic?

Growth outlook stronger as economies adapt

Despite the persistence of Covid-19 cases, the outlook for the global economy has improved. There are three key factors underpinning this:  

  1. Effective vaccines
  2. Significant spending by governments
  3. The improved ability of economies to adapt and operate remotely

However, less attention has been paid to the third factor in the recent recovery. This may be more important in the long run as it has given business an unprecedented opportunity to undertake an experiment (albeit forced) with different ways of working. And many have successfully adjusted to the operating restrictions imposed by the virus.

Undoubtedly, there has been a “survival of the fittest” effect, with the most exposed and weaker firms going out of business in the first wave of shutdowns.

Nonetheless, there is also a learning process. One key driver of the ability to adapt has been the greater use of technology in allowing business to operate remotely. Firms have to be digital to participate in the locked-down economy so investment plans have sped up.

Digital drive to boost productivity growth

Will this lead to higher output per worker? In our view yes, but the improvement seen in the figures so far is largely a result of a Darwinian selection process. This has changed the mix of output in the economy away from labour-intensive services towards more productive sectors.

At this stage, the Covid-19 recession looks like being the first where productivity ends up being stronger in more than 60 years. The mix effect is likely to reverse somewhat as the service sector returns, but looking further ahead it seems likely that greater use of technology will contribute to an improvement in productivity over the medium term.

While there will be significant adverse effects from the pandemic as workers are displaced and businesses are permanently closed, for many the pandemic will have enabled experimentation with different ways of working. Meanwhile, increased business investment stands in contrast with the experience after the Global Financial Crisis when reduced investment weighed on potential output growth.

The key point is that, for many, productivity should not necessarily be worse and may well be better as the economy re-opens. Combine this with the increase in AI and robotics, which is bringing gains to parts of the service sector, and the long-awaited benefit of increased technology on productivity could come through and reverse the downtrend of the past decade.

Does this risk a rise in populism?

However, there is also a risk that increased use of technology may make the efforts of policymakers to address inequality more difficult as the fourth industrial revolution displaces more workers. History shows social unrest increasing after a pandemic is over, creating an environment for more populist policies.

After a pandemic whose economic effects have disproportionately been felt by lower paid workers, policymakers may need to be wary. The challenge will be how politicians can address issues such as inequality and meet the rising demands for higher public spending in other areas, such as health and climate issues.

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Keith Wade
Chief Economist & Strategist


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