Friday, April 19, 2019

Digital disrupts the world's economy

Inflation, wages, productivity and trade are radically affected by technological change

By James Pomeroy

Technology and the internet are changing our lives. Online shopping is displacing the high street. The gig economy is disrupting employment patterns and wages. Gaming and streaming are altering leisure habits.

But economies are being affected by the transformations to our lifestyles resulting from smartphones, artificial-intelligence, virtual-reality, autonomous cars, the internet of things and 3D-printing.

Online shopping and price-comparison websites give consumers better information and more choice of places to buy, making it harder for companies to raise prices. Central banks are thus questioning whether inflation targeting remains valid for setting interest rates, or if alternative targets or broader data sources should be investigated.

But firms struggling to raise prices look to cut costs, including payrolls. Despite tight labor markets, global wage growth remains subdued with automation, or its threat, dampening bargaining power in low- and mid-skilled jobs.

Many jobs are open to technological threat, but some low-skilled low-wage labor may not be worth replacing: instead, higher-skill work could be vulnerable because the savings are greater. But while robots may steal some jobs, they will also create many new ones.

And technology can improve productivity, allowing workers doing menial tasks to focus on higher-value – possibly better-paid – work. It can free doctors to focus on treatment decisions, release teachers from administrative tasks, or save lawyers from scouring documents for key details.

If labor-market disruption impacts wages and employment, should governments revisit taxation policies? Should they tax robots? And should countries focus on the STEM subjects – Science, Technology, Engineering and Mathematics – plus continued learning to give workers the skills to make the most of ever-evolving technologies?

Governments must also think about how measurement of economic growth is affected by new means of consumption. Internet data sources have replaced paid-for encyclopaedias, for instance, while smartphones not only give access to free games, they mean we need no longer need buy alarm clocks, cameras, calculators or even games-consoles or PCs.

And if technology allows flexible working or shorter working weeks, productivity gains may increase leisure time rather than lift GDP. Measures of happiness and wellbeing may be more important than economic growth.

Smartphones allow the world to move away from cash and in response, some central banks are considering creating digital currencies, possibly using blockchain.

We are nevertheless just at the start of a multi-decade wave of disruption, with tech-savvy, young populations setting the pace. The ‘digital native’ generation born after 1990 is better at using computers and consumes things differently.

The share of developed-market consumers from this generation looks set to double by 2030, but in emerging economies it could quadruple to almost 40%. About 600m to 700m people in emerging countries gain access to the internet every year.

The implications are huge. On current trends, the share of US retail sales that are online could rise from 10% today to well over 30% by 2030. In the developed world, workplaces are seeing 1.5m less-IT-literate people leave each year and be replaced by better skilled staff who have grown up using computers.

Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: James Pomeroy

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