Rise of the robots - good news or bad for businesses and society?

Highlights

Once again this year, the outcome of a vote, this time in the US, has surprised. Donald Trump is gradually announcing his plan for the first 100 days of his presidency, which features many of his policies from the campaign trail, such as withdrawing from the Trans-Pacific Partnership (TPP) trade agreement. However, in some cases President-elect Trump is now taking a materially different stance to candidate Trump, refining many of his key pledges (e.g. for Obamacare), leaving the world wondering about the policies he will actually pursue.

November saw the release of the latest Q3 GDP growth figures for most large economies. Eurozone growth lagged behind that of the US and UK. But this masks the strong performance of the periphery Eurozone countries, such as Spain and Cyprus, which continue to outperform the core countries of Germany, France and Italy.

The UK economy grew by 0.5% quarter-on-quarter, down on Q2 but still a respectable rate of growth showing little immediate impact from the Brexit vote. Looking to next year, however, against a backdrop of continued uncertainty regarding Brexit, the Office for Budget Responsibility (OBR) has downgraded its official projections for GDP growth from 2.2% to 1.4% for 2017. Against this weaker outlook, the Chancellor’s Autumn Statement focused on boosting productivity growth and investment, announcing measures to support infrastructure, housing and science and innovation.

The UK government also abandoned its aim to achieve a budget surplus by the end of this Parliament, choosing to follow the path of (modest) fiscal stimulus rather than continued austerity. We have seen other large economies—Canada, Japan, and the US—adopt this approach recently, taking advantage of low interest rates on offer to try to provide a long-term boost to productivity. We discuss why now is the right time to provide a fiscal boost, at least for countries with the necessary fiscal space.

As we approach Christmas, many consumer-focused businesses will be hoping for a bumper season of household spending. In this month’s GEW, we analyse the drivers of household spending and the implications for businesses in their revenue forecasting and planning. In the UK, gross disposable incomes are up and the savings ratio is down relative to this time last year, suggesting that this could be a promising Christmas period for European retail and consumer businesses, despite the Brexit vote.

Rise of the robots - good news or bad for businesses and society?

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PwC's Barret Kupelian discusses the implications of discretionary disposable income and savings for household spending in Europe this Christmas.

Economic update: Are households feeling the benefits of the recovery?

How far have the advanced economies recovered since the crisis?

Last month marked eight years since the collapse of Lehman Brothers – widely considered as the  defining moment of the global financial crisis. In most of the G7 and other major Eurozone economies, output levels have surpassed their pre-crisis levels. But is it enough to only consider real GDP when assessing the extent of the recovery?

In a recent blog, our UK chief economist, John Hawksworth, assessed some alternatives to total GDP growth that may better capture the extent to which individual households in the UK are feeling the benefits of the recovery. We have now extended this analysis to other leading economies.

Household spending growth per person is lagging behind real GDP growth in most advanced economies

We found that the recovery in real household spending per person has not kept pace with that of real GDP in the majority of the 12 advanced economies we considered (see Figure 2). For seven of these countries real household spending per person is still below its pre-crisis level.

This measure paints a less optimistic picture of the post-recession recovery for the average person, and presents a challenge for businesses focused on consumer goods and services as their revenue is more sensitive to household spending patterns. This emphasises the point that some businesses should look at more than just GDP trends when making revenue projections.

Focus on: Three key policy measures to contain inequality

Inequality is on the rise in rich economies

Income inequality has gradually crept up the agenda of policymakers in recent years. There are two main reasons for this. First, a more equal society could increase economic growth. Recently, an IMF Staff Discussion Notefound that a 1 percentage point increase in the bottom 20%’s income share is associated with a 0.38 percentage point increase in economic growth over the next five years.

Second, greater economic inequality could lead to greater social friction and potentially undesirable political outcomes. Looking at trends in OECD economies over the past 35 years, for example, shows that income inequality—as measured by the Gini coefficient—has gradually increased, and books like ‘The Spirit Level’ have argued that this has been associated with increasing social problems (although proving causality here is more difficult).

Therefore, countries that have been successful in creating or maintaining conditions supportive of low levels of inequality are understandably in the spotlight. In the G7, this includes economies like Germany and Japan (see Figure 3). And across the OECD, the Nordic countries continue to have some of the lowest levels of inequality. 

So what makes these economies more equal? We have identified three key policy features that we think have contributed to maintaining relatively low levels of income inequality in these advanced economies:

1. Providing equal educational opportunities: Access to high-quality education, with strong links to employers, is a feature associated with most economies that have low levels of income inequality. The Nordic approach focuses more on generous government funding of the education sector to support universal access. Specifically, the five Nordic states (Denmark, Sweden, Finland, Iceland and Norway) spend an average of 6.5% of GDP on education, compared to the OECD average of 4.8%.

The German approach focuses more on maintaining links with businesses. For example, its dual education and vocational training system engages students in apprenticeships alongside school lessons.

This makes it easier for students to get a job in a skilled profession without formal tertiary education. Engaging businesses also helps offset a skills mismatch.

2. Supporting low income workers: Protecting the vulnerable, by ensuring low-income workers earn a living wage, is another feature associated with more equal societies. In Sweden and other Nordic economies, for example, this comes through collective bargaining where trade unions are focused on limiting wage and gender inequality.

Other more equal OECD economies including Slovenia, the Czech Republic and the Netherlands set relatively high national minimum wages (a trend the UK has started to copy recently, though it is too soon to judge the effect of this on its income inequality levels).

3. Maintaining a fair and transparent tax and spending system: Nordic countries operate relatively generous welfare systems which redistribute income from the wealthy to the less well-off in the form of benefits to low earners, child allowances, and housing support. However, our research shows that this is not enough.

Transparency extends throughout government: in Denmark, ministers release monthly expenses; in Sweden, government spending records are publicly available. This transparency holds politicians to account and encourages everyone to pay into the system, trusting their money will be used appropriately for redistribution and the provision of good quality public services.  

The impact of technological breakthroughs on businesses and society

The debate around the impacts of technology is hotting up

In 2005, there were less than one million industrial robots in the world. Today there are 1.8 million - higher than the population of Philadelphia. And looking forward, the International Federation of Robotics project that growth in the number of industrial robots will accelerate and reach around 2.6 million by 2019.

Typically, technological changes have a positive impact on labour productivity. For example, the information technology boom, which started in the late 1990s, increased US productivity to 2.8% per annum (1995-2004 period) compared to its long-term average of 1.9% per annum (see Figure 1). But what do technological breakthroughs mean for businesses and society as a whole?

Technological breakthroughs can help businesses contain costs…

Technology already plays a major role in the manufacturing sector but as robots become better and more sophisticated, we expect their impact to gradually permeate more industries, and, potentially the services sector, which accounts for most jobs in industrialised economies. Most business leaders are already taking notice of these changes and are factoring it into their corporate strategy. At a global level, our latest annual survey shows that 77% of CEOs think that technological progress is the megatrend most likely to transform how businesses interact with their stakeholders (see Figure 4). 

For businesses, technology can lower costs and increase efficiency. For example, robotics could help businesses make better use of their existing capital stock and increase margins. If so, this could create further demand for traditional forms of investment (e.g. warehouses and machinery). The prices of goods and services could also drop (or increase more slowly) if businesses pass on these productivity gains to consumers through lower prices, which they should do so long as markets are competitive.  

…but what impact does technological change have on jobs?

Innovation is usually cited as the main driver of a decrease in labour’s share of total output (see Figure 5) and the increase in the Gini coefficient – a measure of income inequality (see Figure 6).

While technological change could have helped shape these trends, we don’t think it’s the only game in town. Increased competition from China and other emerging markets, and offshoring to those countries, may also have played a role, although this trend could moderate over time (or even reverse) as we have seen reshoring pick up in some advanced economies. Also some other factors that could explain the rise in inequality include declining trade union power since the early 1980s in many advanced economies as well as changes in tax systems in some countries that have favoured higher earners (notably in the US and the UK).

It is, however, realistic to suggest that more “sophisticated” technological change could have displaced some labour, particularly at the lower skilled end of the market. For example, in the US (and other western economies) this could partly explain the loss of 6.5 million manufacturing jobs over the last 35 years (but with no corresponding drop in output). This approach, however, ignores the fact that labour could have been absorbed into other sectors of the economy — the US services sector, for example created around 50 million jobs over the same period. 

Are these societal trends likely to continue?

Looking ahead, technology that complements labour is expected to have less adverse effects on jobs than technology that replaces labour. In many consumer services sectors, for example, where human contact and care is of central importance, there is less scope for robots – at least for the time being – to replace humans.

In other areas, however, automation may represent more of a threat to jobs, though the debate on the scale of this effect remains heated. Frey and Osborne (2013)estimate that around 47% of current jobs in the US could be at high risk from technological progress over the next two decades, but an OECD study finds that only 9% of jobs would fall into this category if you look in more detail at the multiple tasks required for these jobs. Digital technologies also create new jobs, as we have argued in past research, so the effect is by no means all negative. 

Who will be the main winners from technological progress?

Technological breakthroughs are a disrupting force for businesses and workers. But for those businesses that can adapt fastest to new technologies, and workers with characteristics that machines don’t currently have, such as creativity and empathy, improvements in technology could deliver substantial economic gains. 

Contact us

Barret Kupelian
Senior Economist
Tel: +44 (0)20 7213 1579
Email

Conor Lambe
Economist
Tel: +44 (0)20 7212 8783
Email

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