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For years, productivity growth has been the missing ingredient in global economic recovery. Now, early signals suggest artificial intelligence could be changing that quietly, unevenly, but meaningfully.

Fresh business surveys from Europe point to a surprising pattern: economies are producing more with fewer workers. If sustained, this shift could alter inflation dynamics, labor markets, and monetary policy across the world.

Early Signs of a Productivity Shift

The United States has long set the pace on productivity, powered by technology, flexible labor markets, and capital investment. Artificial intelligence is widely expected to reinforce that advantage.

What’s new is the possibility that these gains may no longer be confined to the U.S.

Recent purchasing managers’ index (PMI) data indicates that parts of Europe are beginning to show similar dynamics higher output alongside falling employment—an early marker of productivity growth.

UK Business Output Rises as Hiring Falls

According to PMI figures released Friday, British businesses started the year with strong momentum. Output expanded at its fastest pace since April 2024, supported by solid domestic demand and improved export conditions.

At the same time, employment declined sharply. Survey respondents reported accelerated job losses compared with December, extending a trend that has been visible since late 2024.

Britain’s PMI employment sub-indices have remained below the level that separates expansion from contraction for several months suggesting firms are producing more without adding workers.

In economic terms, that is productivity growth in its simplest form.

Germany Shows a Similar Pattern

Germany’s January PMI data painted a comparable, though less clear-cut, picture.

Business output climbed to a three-month high, while employment fell at its fastest pace since November 2009 excluding the pandemic period. The divergence between rising output and shrinking payrolls mirrors developments seen in the UK.

PMI data is not a perfect match for official government statistics, and economists caution against drawing conclusions from a single month. Still, the alignment across multiple economies has caught analysts’ attention.

Economists Urge Caution but Not Dismissal

JP Morgan economist Allan Monks notes that the ratio of output to employment in the UK—a rough but useful productivity proxy—is now at its highest level since August 2013, once pandemic distortions are excluded.

Morgan Stanley economist Bruna Skarica also highlights the trend, while urging restraint.

“A degree of skepticism around the PMIs is probably warranted,” she wrote, “but the dynamic of resilient growth and sluggish labour demand merits more attention.”

In short, the signals may be imperfect but they are consistent enough to warrant scrutiny.

Is AI the Common Thread?

Many economists believe artificial intelligence is the most plausible explanation.

Across industries, companies are accelerating investment in automation, machine learning, and AI-powered tools designed to cut costs, improve efficiency, and boost output. From logistics and finance to manufacturing and customer service, firms are betting that AI will reshape workflows faster than previous technology waves.

That investment push is already well underway in the United States. The question now is whether it can narrow the productivity gap between America and the rest of the world.

China’s Productivity Bet Looks Stronger

Among major economies, China appears best positioned to translate AI investment into productivity gains.

The world’s second-largest economy has already recorded efficiency improvements in sectors such as automotive manufacturing, steel production, and high-value industrial goods. These industries benefit directly from automation and advanced computing.

Goldman Sachs economists estimate that China’s computing capacity is beginning to outpace that of the United States and could roughly double over the next five years providing the infrastructure needed to scale AI adoption.

Europe Remains the Weak Link

Europe, by contrast, faces deeper structural challenges.

Economists have long cited weak innovation ecosystems, heavy regulation, high public debt, and low private-sector investment as barriers to productivity growth across the continent.

Goldman Sachs estimates that AI-driven productivity gains will add only about 0.05 percentage points to European growth in the near term. After 2030, that contribution could rise to roughly 0.2 percentage points annually.

Even then, Europe would lag far behind the United States, where AI is expected to add around 0.4 percentage points to annual GDP growth.

Why Productivity Matters for Inflation

Productivity growth is not just an academic concern it has real implications for inflation and interest rates.

Federal Reserve Chair Jerome Powell acknowledged in December that stronger productivity could help bring inflation down while allowing the central bank to maintain a more accommodative stance.

When productivity rises, businesses can increase output without raising prices, easing inflationary pressures. That dynamic gives central banks more flexibility to support growth without aggressively tightening monetary policy.

If productivity gains spread globally, central banks may be able to hit inflation targets without drastic rate moves.

The Labor Market Trade-Off

The upside, however, comes with a risk.

If AI enables economies to grow with fewer workers, maintaining full employment could become more difficult. Job displacement may accelerate even as overall output rises—a challenge policymakers are still grappling with.

Powell is expected to revisit these themes when the Federal Reserve meets this week, as officials balance inflation control with labor market stability.

Data Limitations Still Loom Large

Despite the optimism, productivity remains one of the hardest economic variables to measure accurately.

Errors in underlying labor data can distort productivity calculations. Britain’s Office for National Statistics, for example, acknowledged flaws in its labor market data last year—raising questions about the reliability of some productivity estimates.

Economists stress that sustained trends over several quarters, not single data points, will be needed to confirm a genuine shift.

Investors Are Betting Big on AI

Still, markets are not waiting for perfect data.

Trillions of dollars in AI-related investment are expected globally over the coming years. Investors are wagering that these expenditures will eventually translate into higher productivity and stronger growth.

This week’s earnings reports from U.S. technology giants including Meta, Microsoft, and Apple may offer clues about whether AI spending is beginning to deliver measurable returns.

A Turning Point or Another False Start?

It is far too early to declare a global productivity renaissance. The history of technology booms is littered with exaggerated promises and delayed payoffs.

Yet for the first time since the AI frenzy began, real-world economic data is starting to hint that the transformation may be materializing not just in theory, but in output, efficiency, and growth.

Whether these early signals evolve into a sustained global shift remains uncertain. But the possibility alone is enough to reshape how policymakers, investors, and workers think about the next phase of the global economy.

(With inputs from a Reuters report.)

 

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