Digital adoption will spur productivity

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Digital adoption across economic sectors will determine the path of future growth, according to an analysis of the University of Cyprus’ Economic Research Centre.

The analysis stresses the importance of digital uptake to increase productivity.

According to the analysis of “Sectorial Labour Productivity Trends in Cyprus” between 2015 – 2021, the technology-intensive sectors experienced a productivity surge, whereas industries that rely on face-to-face contact performed the worst.

According to the conclusions of the research, between 2015 and 2019, after the economic recession and before the COVID-19 crisis, Cyprus’ economy enjoyed, on average, 1.1% labour productivity growth.

The highest labour productivity growth was observed in the Information & communication sector, with 6.4% growth.

This was due to the Total Factor Productivity (TFP) growth in the sector, which more than compensated for the reduction in capital deepening.

Real estate and the financial & insurance activities sectors’ output per labour contracted by 7.1% and 5.2%, respectively.

Most of the loss in the Financial & insurance sector’s labour productivity was almost entirely attributed to its TFP reduction.

During the COVID-19 pandemic and recession in 2020, sharp declines in growth occurred: real output and labour growth fell by 4.5% and 6.5%, respectively.

Nevertheless, labour productivity growth rose to 2%.

Unlike previous recessions, after COVID-19 in 2021, growth rebounded rapidly, with output and labour recovering by 6.4% and 4.7%, respectively.

The analysis of sector-level data showed that the impact of the shock had been asymmetric across sectors.

Labour productivity growth increased soon after the first lockdowns in technology-intensive sectors such as the Financial & insurance activities and the Information & communication (ICT) sectors, where working remotely was feasible, and firms could take advantage of new digital/online solutions.

The gains in labour productivity growth, even though to a lesser extent, were retained during 2021.

In sectors like wholesale, retail & accommodation, the Arts, entertainment & recreation, and Construction that rely more on face-to-face interactions, the containment measures had a negative impact on labour productivity growth.

“The acceleration in digital uptake could be a positive outcome of the crisis.

“To the path towards higher productivity growth, policies that target on increasing the degree and the speed of economy’s digitalisation are of the utmost importance”, the study said.

Equally important for long-term productivity are solid economic institutions, labour market flexibility and physical and digital infrastructure.