Euro area productivity growth could slow further in the event of a downturn

Abstract

The euro area productivity slowdown in the early 2000s can mainly be attributed to weakening innovation. However, since 2008 productivity growth has slowed due to a crisis-induced drop in technology adoption. This implies that a shortfall in aggregate demand may spill over to the supply side, as weak demand depresses technology investments and thus makes recessions deep and long-lasting. These findings contrast with conventional macroeconomics, which assumes that cyclical fluctuations do not affect technology growth. Policies which support sound economic conditions are therefore also key for productivity growth.