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The great inflection

Graeme Leach, CEO & Chief Economist of Macronomics, says that we stand on the cusp of a huge surge in 5G-enabled productivity growth

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Way back in 1938, Alvin Hansen, the President of the American Economic Association, described how economies could get into a trough of persistent low growth. He coined the phrase “secular stagnation” (a condition where there is negligible or no growth in a market-based economy) and described how technology was “the last great hope” for getting out of the rut. The phrase secular stagnation has made a return in recent years, but what’s been less stated is the capacity for technology to accelerate productivity and GDP growth. In fact, the opposite has been the case, with a focus on the paradox of a technological revolution alongside weak productivity growth.

Professor Eric Brynjolfsson, head of the Digital Economy Lab at Stanford University, has written that: “This is one of the great puzzles of our era. Amazing technologies, but so far, slow productivity growth.”

The pervading malaise about the economic outlook has obviously intensified in the wake of Covid-19, but I believe that this is precisely the wrong moment in economic history to be pessimistic. We stand at the cusp of profound economic change, as a result of a technology led surge in productivity growth – what might be called The Great Inflection of the 2020s and beyond. 

Covid-19 as an accelerator

Indeed, to the extent that Covid-19 puts history on fast forward, with the more rapid adoption of new digital models of working, retailing and learning, it could well accelerate the adoption of new digital business models and hasten an acceleration in productivity growth. This is a classic turning point in economic history – and one when you most definitely can’t see the road ahead through the rear view mirror. Past productivity performance is a very poor indicator of the future.

Economic history teaches that there is a long lag between the introduction of a new technology and its ultimate impact on the economy. We have been on a journey, with 3G and 4G for example, but now the ultimate destination is becoming clearer. We shouldn’t be surprised it has taken so long. Economic history suggests that the more profound and far reaching the technological shift, the longer the time until it fully impacts the economy. After all, it took more than 30 years from the first electric power plant in the 1880s, to Henry Ford’s first automated assembly line and mass-produced vehicles in 1913. The timeframe is far less with mobile technology, but it still takes time for new business models and innovations to take shape, alongside the continued development of the tech and the capabilities it permits – from 2G to 3G to 4G to 5G.

But what lies behind the potential productivity acceleration that 5G will drive? A very big part of the answer is its role as the connective ‘glue’ behind fast-growing innovations such as AI, IoT and edge computing. In this way, it can be seen as a General Purpose Technology (GPT) with profound and pervasive impacts across the whole economy. This is the essence of a GPT, that it leads to fundamental economic innovation across the entire economy, not just within its own sector. 5G will thrust mobile technology into the elite realm of GPTs such as electricity or the internal combustion engine. It will be the missing link between technological revolution and faster productivity growth, moving mobile beyond connectivity towards the development of rich solutions and services. There is a fundamental point here. Today’s primary technological innovation is not a change in form (e.g. a physical invention) but in function (e.g. how to enable existing functions to be undertaken more efficiently).

Standard economic modelling techniques across a number of studies, such as this 2018 report, suggest that 5G might add around 0.3 percentage points per annum to economic growth. Not bad, and we’ll take what we can get at present, but hardly brilliant. I’d argue that it could be far more. 5G will impact in many ways.

Firstly, by changing the efficiency in production and distribution of existing goods and services. The value is not in 5G itself but in the value of the goods and services enabled by 5G. One study by IHS Markit suggests this could reach $12 trillion by 2035. That’s roughly half the size of the US economy

Secondly, by changing efficiency through the introduction of new goods and services, from AR/VR training experiences for manufacturing, for example, to the increasing use of real-time telemetry.

Thirdly, by changing society in qualitative ways that are hugely significant. For example, the arrival of smart cities, autonomous vehicles and congestion management through 5G and the IoT. Perhaps even greater could be the facilitation of health and wellness through wearables and sensors providing constant monitoring, and telehealth anytime, anyplace, anywhere. 

Fourthly, by 5G’s impact on globalisation. 5G and 3D additive manufacturing could herald an era of onshoring not offshoring in the advanced economies, helping to lower a company’s carbon footprint. 5G could also provide the advancement in monitoring processes that companies require before they consider offshoring. 

Finally, most profoundly, 5G will facilitate a veritable explosion in video content that potentially shrinks the world towards a genuine global village. In other words, it could help ensure that in a post Covid-19 world we don’t see the end of globalisation. 

5G will thrust mobile technology into the elite realm of General Purpose Technologies

5G’s impact on the ‘hidden’ technologies

5G will take us from what might be termed simple to complex digitalization. It will provide the sum of all hopes for the digital economy. What’s more, the most profound technological impacts are for those technologies which are largely hidden from view – such as electricity – and yet are central to everything we do. In this sense, the real action in the digital economy in the 2020s is likely to be on the supply-side – not the demand-side. It’s likely to directly impact the producer most, whilst also be hugely significant for the consumer. Obvious examples are the gains from 5G in combination with the IoT, with 75 billion devices predicted to be connected to the IoT by 2025 – and the cost reductions and productivity gains associated with predictive maintenance being just one example.

The problem of course is that we can’t easily envisage the form this revolution will take, because that’s the job for the entrepreneurs who will make the future. Who would have described the nature of Google or Facebook five years before they were formed? However, there is a deeper point here as well. 5G could precipitate an entrepreneurial renaissance as investors search for new ways of exploiting its potential. 

As yet there isn’t a killer 5G app which helps define the future, but systems are already in development to incorporate millions of sensors together as part of the manufacturing process. We have a glimpse of the near future.

It’s estimated that by 2025 around $1 trillion will have been invested in 5G. But this could be dwarfed thereafter by the wider investment as a consequence of 5G infrastructure and devices being available across the whole economy. 

And it will not be the private sector alone which is profoundly impacted by 5G. One of the defining characteristics of the public sector has been the difficulty in raising productivity in people-facing services such as health and education – known as Baumol’s Cost Disease. 5G could facilitate a transformation in productivity in these occupations, helping ease the burden of a rapidly ageing population – and ensuring education remains universally accessible, even during pandemics.

Amara’s Law states that we tend to over-estimate the impact of technology in the short-term and under-estimate it in the long-term. That is the mistake we are making at present. A little bit of history might help here as well, when we remember that the Spanish Flu of 1918-19 was followed by the ‘Roaring Twenties’ as the impact of technologies invented decades before (electricity, internal combustion engine) truly came to dominate the economy. That is the great hope now, and one that is more likely to be realised as Generations Y and Z move towards the C-suite.

So while the internet and mobile technology may have not yet driven the kind of productivity advance that the world expects, rest assured that a 5G-led ‘great inflection’ in growth is just around the corner. Business is about to get very interesting.

Business is about to get very interesting
graeme leach

About Graeme Leach

Graeme Leach is one of Britain's leading economists and CEO and Chief Economist of Macronomics. Macronomics is a macroeconomic, geopolitical and future megatrends research consultancy formed in 2016. Over the past decade Graeme has made 100s of speeches on the future economic outlook, and economic policy, in the UK and more than 25 countries across the globe.

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