Episode Details

With the trend toward a multipolar world accelerating, companies are finding that investing in productivity may help protect margins. Ravi Shanker and Diego Anzoategui discuss.

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Ravi Shanker: Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's North American Freight Transportation Analyst. 

Diego Anzoategui: And I'm Diego Anzoategui from the U.S. Economics Team. 

Ravi Shanker: And on this special episode of the podcast, we discuss what we see as The Great Productivity Race, that's poised to accelerate. It's Tuesday, May 2nd at 10 a.m. in New York. 

Ravi Shanker: The transition away from globalization to a decentralized multipolar world means companies' ability to source labor globally is contracting. This narrowing of geographical options for companies is making cheap labor, particularly for skilled manufacturing, harder to find. But there is a potential positive, a rebound in productivity which has been anemic for more than a decade.

Ravi Shanker: So Diego, what's the connection that you see between the slowing or even reversal of globalization and productivity trends? 

Diego Anzoategui: If you think about it, the decision to upgrade technologies and increase productivity is like any other type of capital investment. Firms decide to improve their production technologies, either to deal with scarce  factors of production or to meet increasing demand. COVID 19 was a negative shock to the labor supply in the U.S., and there is still a long road ahead to reach pre-pandemic levels. On top of that, we think that slowing globalization trends will likely limit labor supply further, causing real wages to increase, and keeping firms under pressure to improve productivity to protect margins. But we think firms will boost productivity investment in the medium term once business sentiment picks up again. And we are past the slowdown in economic activity that we expect in 2023 and into 2024. Expectations are key because the decision to innovate is forward looking, adopting new technologies takes time and the benefits of innovation come with a lag. 

Diego Anzoategui: Ravi, as a result of COVID and the geopolitical uncertainties from the war in Ukraine, companies have been dealing with a number of significant challenges recently, from supply chain disruptions to worker shortages and energy security. How are companies addressing these hurdles and what kinds of investments do they need to make in order to boost productivity? 

Ravi Shanker: Look, it's a good question and certainly a focus area for virtually every company anywhere in the world. The last five years have been very challenging and a lot of those challenges have revolved around labor availability and labor cost in particular. So I think companies are approaching this with two broad buckets or two broad focus areas. One is, I think they are trying to reinvest in their labor force. I think for too long companies' labor force was viewed as sort of a source of free money, if you will, an area to cut costs and gain efficiency. But I think companies have realized that, hey, we need to reinvest in our workforce, we need to raise their wages, improve their benefits, give them better working conditions, and make them a true resource that will obviously contribute to the success of the company over time. And the second bucket they're looking at is just broader long term investments in things like automation and productivity technologies, because many of these labor trends are structural, that are demographic issues, that are geopolitical issues, that are not going to reverse anytime soon. So you do need to look for an alternative, particularly in areas where, you know, jobs that p