Links between weak investment and the slowdown in productivity and potential output growth across the OECD

The OECD framework for estimating potential output is combined with previous OECD empirical researchto analyse the causes of recent weak productivity growth. Current weak labour productivity growth in manyOECD countries reflects historically weak contributions from both total factor productivity (TFP) growth andcapital deepening. The slowdown in trend productivity growth in the pre-crisis period is mostly explained by along-established slowdown in TFP growth, but since the crisis, the further deceleration is mainly due to weakcapital deepening, a development apparent in practically every OECD country. Much of the weakness in thegrowth of the capital stock since the financial crisis can be explained by an accelerator response of investmentto continued demand weakness, leading in turn to a deterioration in potential output via a hysteresis-like effect.Circumstantial evidence suggests that a misallocation of capital in the pre-crisis period also contributed to theslowdown in capital stock growth, particularly among the most severely affected countries. In many OECDcountries, declining government investment as a share of GDP has further exacerbated post-crisis weakness incapital stock growth, both directly and probably indirectly via adverse spillover effects on business investment.Finally, at a time when the use of conventional macro policy instruments has become increasingly constrained,the slower pace of structural reform represents a missed opportunity, not least because more competitionfriendlyproduct market regulation could have boosted both investment and potential growth.