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An Economist’s response to Dr Zhu Min

Dr Zhu Min issued a stark warning of substantial near-term volatility at the World Built Environment Forum Summit in Shanghai, April 2017.

Sean Ellison, Senior Economist, RICS
14 September 2017

New normal

At the core of Dr Zhu’s argument was that the global economy had transitioned to a "new normal" of low growth, low inflation, low productivity, low trade, low interest rates, and heightened volatility in asset markets.

Many of these points are difficult to argue. Growth has certainly been depressed since the onset of the Global Financial Crisis, driven in part by firms’ deleveraging process sapping capital investment from the private sector. As Dr Zhu quite correctly pointed out, population growth is also likely to slow in developed countries, and by the middle of this century most developed countries will rely on migration as the primary driver of population growth — Canada already does.

The productivity paradox

One of the keys to Dr Zhu’s argument was that low productivity could persist. Nobel Laureate and Princeton professor Dr Paul Krugman once said "productivity isn’t everything, but in the long run it is almost everything." Official statistics show a notable slowdown in productivity since the onset of the Global Financial Crisis.

However, there are a lot of questions surrounding the statistics around productivity, and they are not without their detractors. Several eminent economists, including Google’s Hal Varian, argue that productivity is underestimated as many salient efficiency gains are not captured by official statistics.

During a similar debate in 1987, Nobel Laureate and MIT professor Dr Robert Solow remarked that "you can see the computer age everywhere except for in the productivity statistics." Even current Bank of England Chief Economist Andrew Haldane noted in a speech in April 2017 that “the past few years have served to underscore just how partial economists’ understanding of productivity remains.

Innovation within the built environment

It is easy to see this trend within the built environment. Take co-working spaces as an example – these give firms the ability to crowdsource anything from advertising to engineering. These enhance efficiency and provide a more optimal outcome than would have otherwise been achieved, but these efficiency gains are unlikely to be captured by any traditional growth or productivity statistics.

Although these productivity gains may not be completely captured by official statistics, they still exist, and will continue to do so. Drones are already revolutionizing how logistics are utilized across the developed and developing world. Driverless cars, machine learning, and artificial intelligence are set to transform how we use infrastructure, office, and industrial spaces in ways we have not even thought of yet.

The way forward

These are only a taste of the challenges that lay ahead for the built environment, and will be what drive the future of global growth. Though productivity statistics may not fully show it, the financial crisis has not dampened the progress of the innovative spirit.

Such an environment puts a premium on real estate assets from an investor's perspective. Real estate and infrastructure investment not only generally provide relatively stable returns compared with price the greater volatility seen in other asset classes, and also has the potential to deliver higher returns over the long run given the low growth/inflation/productivity environment world we have found ourselves in. The sector continues to be an attractive destination for capital to fund innovation in the built environment.

The World Built Environment Forum facilitates industry leading discussions harnessing the enormous potential of the 21st century's people and places.