home news & media press releases article productivity is almost everything : the drivers and implications of productivity differences between the us and eu - remarks by governor gabriel makhlouf at the global interdependence center, phil press releases productivity is almost everything : the drivers and implications of productivity differences between the us and eu - remarks by governor gabriel makhlouf at the global interdependence center, philadelphia 17 june 2024 speech good morning. thank you for the invitation to join you. it is a pleasure to be here today introduction the global economy is recovering from a sequence of large shocks in recent years, with the pandemic followed quickly by a sharp increase in inflation in the wake of russia ’ s war on ukraine and its people. the necessity to deal with these immediate challenges meant that the attention given to major long - term challenges has been curtailed in recent years. one of these major long - term challenges is the slowdown in global economic growth ; the imf forecast for global growth five years from now is 3. 1 per cent, the lowest it has been in decades. economic growth can be decomposed into the contribution of employment growth, growth in the physical capital stock, and the growth in productivity, which reflects the technologies and efficiency with which capital and labour are used in production. a key reason for the growth slowdown has been a slowdown in productivity growth. it is important to note that productivity has both a cyclical component, which fluctuates significantly over the business cycle, and also has a structural component, which is more slow moving and depends on deeper underlying factors. an important part of the more rapid productivity growth of the us relative to the eu since the pandemic is likely explained by cyclical fluctuations in productivity. over the medium - term, a more productive economy raises potential growth by boosting the supply - side, thereby contributing to lower price pressures. cyclical productivity developments also feature in the latest eurosystem staff projections, where the baseline projection envisages an uptick in labour productivity to offset the impact of higher wages on costs and prices. labour costs matter more for services firms, and services inflation – some 45 % of the overall inflation basket for euro area countries – has been slower to fall than other, more external components, such energy and goods. however, these data can be volatile, and it can take time to discern what exactly is signal and what is noise. as a result, the governing council will continue

to follow a data - dependent and meeting - by - meeting approach to determine the appropriate level of interest rates. at our meeting on the 6 june, we cut rates by 25 basis points, whilst also stating that we are not committing to a particular rate path. this leaves policy rates firmly in restrictive territory, given where we see the nominal neutral rate ( around 2 % in latest ecb estimates ) and the path for inflation. we will deliver on our mandate, which is price stability in the euro area. and i should add, to answer a question that some commentators have posed, we take account of all influences on macroeconomic developments in the euro area, wherever they occur in the world. but, like other central banks, we do not “ follow the fed ” in a mechanistic sense. but my focus today is not on monetary policy or the cyclical component of productivity growth. rather, today i will talk about the concerning long - term trend decline in productivity in both the us and eu. while of course measuring productivity is inherently difficult, to put some numbers to this, from 2007 to 2019, us labour productivity growth in the market economy was 1. 3 per cent, compared to 2. 7 per cent from 1995 to 2007. if we compare this to an average across some of the europe ’ s largest economies, including france, germany, italy, spain, and the uk, the numbers are even starker, with labour productivity growth declining from 1. 3 per cent to 0. 5 per cent over the same period. this decline should be a major concern for policymakers : productivity growth is central to the sustained increase in living standards for individuals, and to the fiscal sustainability of governments in the face of looming challenges such as climate change and an ageing population. this is not of course a revelation. as paul krugman wrote 30 years ago, “ productivity isn't everything, but, in the long run, it is almost everything. a country ’ s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. ” [ 3 ] in the face of such challenges – not least our changing climate – international cooperation and openness is more important than ever. in ireland we are very aware of the importance of such interconnectedness. we are a small open economy on the periphery of europe which has benefited hugely both from being a part of the eu and from developing strong economic linkages with the us. in many ways,