We are all familiar with the rise and fall of the Roman empire. However, the history books disagree as to what really caused its demise. 
Probably the most widely believed reason, although debateable, was that it was a victim of its own success, with excessive good living, wine and complacency eventually leading to its downfall.
Whilst fascinating, the fall of the Roman empire is not the entire point. Of far more importance today is the question of declining productivity in large economies as they mature.
I am not suggesting this is because we are all drinking too much wine and lazing about, but rather that there is clearly something going on which is causing economists to scratch their heads, as productivity growth in developed economies continues to fall. This has profound implications for GDP per capita and, by derivation, earnings per share from businesses in which we invest, and that matters.
One of the biggest gripes today is that the workforce appears to be working more hours than ever but average wages are failing to rise.
Meanwhile, many western economies are at full employment, company profits are robust, but we are not getting richer as a broad populace. This has contributed to the rise of populist politics, which has so occupied the media over the last year and has contributed to the election of Donald Trump, political instability in Europe, and even Brexit.
One of the most significant drivers of productivity has been innovation and that requires expenditure on R&D.
Historically, significant advances have taken place following inventions such as electricity, the combustion engine and the telephone. More recently, the desktop PC, the internet and WIFI Bluetooth technology have caused an explosion in the speed of communication.
This has spawned the creation of some of the biggest companies on the planet, involved with the creation of devices and software to provide access to this. However, the productivity gains this has delivered to industry pale into insignificance compared to the former inventions of a hundred or so years ago.
I recently read an article on this very subject, the most notable part for me being how productivity growth has also declined in China, as the economy has grown exponentially over the last ten years. The shocking part was the degree of this decline being of the order of two-thirds.
So what is going on? Are we destined to become a low-growth world, as all economies rise to the level of modern living standards, with consumers gorging themselves on durables until they eventually become insatiable and lack creative motivation?
The world has been in need of a new innovation for at least ten years and there is an argument that the low interest rate environment that followed the Great Financial Crisis of 2008 extended the trade cycle.
This enabled consumers to upgrade many of their consumer durables through cheap debt, whether that be the latest technology loaded car, 4k television, smartphones, or the ever more exotic holiday.
The next wave of must-have consumer durables will be self-driving electric cars but these will replace existing industries and not transform the productivity of current businesses. It could be argued that this is technological innovation in its purist form but this won’t enable us to do anything we haven’t done before. We will just do it differently whilst the productivity benefits appear to be marginal; the energy to charge them has to come from somewhere.
The recent profit warning from Dixons Carphone is revealing, citing disappointing iPhone sales, as consumers have stepped back from upgrading. Some of this was blamed on the product itself but also Brexit and the price increases, which have occurred as a result. There are high hopes for the next version, but Apple and Dixons Carphone must be feeling anxious.
Similarly, new car sales are stagnating in both the UK and US, but this is likely to receive a boost from electric and hybrid replacements over the next few years. However, the general point is that innovative industrial revolution, leading to productivity growth, appears to be a pipe-dream when looking at what we know about the immediate future.
One area that perhaps is detracting from company profitability is increased bureaucracy and short-termism. The former was a key plank of the Brexit argument ahead of the vote last year and that, coupled with health and safety legislation, which is usually very much absent from emerging economies, could be contributory in developed economies.
We are all aware within the financial services industry of the plethora of necessary regulation that has been introduced over the last ten years; this will continue for the foreseeable future. This introduces permanent cost increases and that reduces profits.
The drive to remove the ‘obscene’ profits of the banking industry, post-Great Financial Crisis and the effect of the Dodd-Frank act, has also constrained the activities of the banking industry to protect us all from another credit crunch. Inevitably, this will have reduced profitability, increased cost, and caused productivity to fall. How much senior management time is absorbed with responding to legislative demands and how much is left to consider significant strategic future investment?
Another behavioural influence is the ageing population. Both the UK and US have record low employment levels, which would historically have caused upward wage pressure, but not so today. The reality is that the global workforce is shrinking, which gives a misleading picture.
Arguably, if we have a smaller workforce producing the same output then productivity should rise, not fall, but this is where confusion reigns with the calculations. It differs between countries and statistical bureaus and focuses on the entire population, more and more of which is no longer working.
The proportion of more highly paid jobs is falling and in an ever-competitive world, business leaders are reluctant to invest if the payback is uncertain. When the political environment is turbulent this is even less likely. Better to distribute the cash to shareholders, or buy back shares to artificially enhance earnings to trigger the LTIP (long-term incentive plan) options, than take the risk. Also, the number of technological investments that have run into implementation problems is high, so have today’s Boards really got the stomach for it?
So, even with interest rates so low, businesses don’t want to push up borrowings to invest: this has been the key reason for rock-bottom interest rates.
Similarly, central banks don’t want to increase interest rates because that may choke off the consumer who is already showing signs of fatigue.
An unfortunate side-effect of this is that unviable businesses survive when perhaps they shouldn’t; perhaps this is the key. We have reversed Darwin’s Law with our policies of zero interest rates.
While this impasse exists, earnings will inevitably grind sideways as consumers await the next must-have game changer. Perhaps the electric car and all its derivatives will be that economic saviour? I hope so, because it is very difficult to see what is going to power the global economy forwards from here. Trump’s reflation policies are baked into the market. If they don’t get going soon, and like Nero, if he doesn’t stop fiddling (or tweeting), earnings forecasts will have to be marked down.
Guy Stephens is technical investment director at Rowan Dartington. The views expressed above are his own and should not be taken as investment advice.