The global productivity dilemma

Nick Anderson and Hamish Chamberlayne are portfolio managers within Henderson’s Global Equity Team, responsible for managing Global SRI portfolios. Here they discuss the implications of withdrawing fossil fuels from the global productivity equation. In a world where debt has been growing faster than gross domestic product (GDP), can a sustainable solution really be found?

It is generally accepted that the global economy has a productivity problem. There are many different pieces of statistical evidence that are put forward to support this assertion but the simplest, and most compelling, is the fact that debt is growing faster than GDP. If debt grows relative to GDP then capital is being allocated unproductively. The ramifications are significant. With most asset classes at, or close to, record highs, investors are struggling to work out where we go from here. The direction of central bank policy has become a daily talking point. Interest rates look set to increase in the UK and US, but when exactly and by how much? What will be the impact on various asset classes?

The conundrum

There is a conundrum at play here. The ultra-low interest rate environment that has prevailed since 2008 has facilitated a misallocation of capital, with the result that debt is growing faster than GDP. This needs to be addressed, but how can it be reasonable to expect the world’s major central banks to raise interest rates aggressively against a backdrop of low productivity growth, disappointing GDP growth and an increasing debt burden? To complicate matters, the issue of climate change is firmly back on the agenda. The economic and investment implications are becoming much better understood. If the world is to stay within the internationally agreed limit of 2°C warming, and avoid the most damaging effects of climate change, then carbon emissions need to peak by 2020.

The time is now

Fossil fuels are disproportionately important to the productivity of our economies. If global GDP was measured from the perspective of useful work done in joules of energy, rather than conventional monetary units, then we would see that fossil fuels contribute much more to global productivity than human labour does. If policy is enacted to restrict the use of fossil fuels then this will represent a further challenge to lifting global productivity.

Although the task of solving the productivity problem is a daunting one, we believe there is a way to start tackling it now. We believe that investing in innovative companies that have products or services aimed at increasing productivity could help secure a future where debt reduction, stronger growth, and reduced dependence on fossil fuels are all possible. Many of the companies that we research and invest in are transforming the industries in which they operate, and are helping to lead the way towards a sustainable global economy. We look across a spectrum of industries: it is not just enough to increase the efficiency with which energy is consumed, or to replace carbon-intense energy sources with renewable sources. We also recognise the importance, for example, of improving the quality and effectiveness of services, such as the growing healthcare industry, and the need for the sustainability of consumer products.

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