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Recovery in output per worker has legs

Output per worker increased for the first time since 2017 last quarter. (See Chart 1.) GDP growth was stronger than expected at 1.1% y/y despite a sharp moderation in employment growth. Employment growth averaged only 0.7% y/y, down from over 2% late last year. The recent slowdown in employment growth appears to be a structural rather than cyclical phenomenon, and we think that labour force growth will continue to slow before probably turning negative within the next five years. (See our Update, “Surge in participation rate nearing its end”, 22nd July.) Meanwhile, business investment should remain high relative to output, so weaker employment growth should be partly offset by strong productivity growth. To be sure, output per worker might fall again in Q4 as domestic demand is dented by October’s sales tax hike. But the general trend will be upwards. We expect productivity growth to climb back towards 1% over the coming decade as the full economic impact of new technologies is felt. (See our June 2018 Focus on productivity growth.)
Tom Learmouth Japan Economist
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