Share

Weak productivity hammers UK economy

London - Low productivity may have been a bigger factor behind Britain's slow economic recovery than previously thought, with potentially stark implications for monetary policy, Bank of England research suggested on Thursday.

Previous research had suggested one-off demand shocks were the main reason for Britain's weak economic recovery from the financial crisis, but the research - co-authored by BoE policymaker Martin Weale - suggested this conclusion was due to flawed statistical techniques.

If the findings are right, they may raise the barrier to the BoE restarting bond purchases - which offer a one-off stimulus to demand but do not tackle underlying issues - and put a greater onus on government and BoE policymakers to tackle Britain's poor productivity.

Weak productivity is a well-known problem for the British economy, and official data released earlier on Thursday showed that on one measure it fell to its lowest level since 2005.

However, existing research referred to in the paper by Weale and two other BoE economists suggested that "temporary demand shocks" - such as headwinds from the euro zone or government austerity - were the main reasons for slow British growth.

Britain's economy shrank by around 7% in the 2008/9 recession, and its recovery since then has been amongst the slowest of the six economies looked at in the study, which include the United States, Canada, Germany, France and Italy.

Earlier work had failed to properly account for the links between these economies, and doing so correctly led to new conclusions about Britain, the study said.

"The previous conclusions are now clearly overturned. Both permanent labour productivity and temporary demand shocks now contribute roughly equal amounts to recent (2010 and 2011) weak output growth in the UK," it said.

"Given this stark difference in results and policy implications, future applied work should therefore not ignore these issues and there might be some merit in a re-examination of past ... research," the study added.

Productivity puzzle

If weak productivity, rather than low demand and a lack of confidence, is behind much of sluggish British economic performance, this would help explain why inflation has often been above target and higher than the BoE forecast.

An unexpected jump in inflation in October was one reason why the BoE decided in November to halt bond purchases once they had reached the £375bn total agreed in July, and most economists do not expect it to restart this stimulus programme .

However, the cause of Britain's weak productivity - and whether it is permanent, or a temporary consequence of the financial crisis - is still largely a mystery.

Part of the reason may be the effect of the financial crisis on Britain's once highly profitable financial services sector, as well as a longer-term decline in highly productive North Sea oil and gas extraction.

Some BoE officials also blame a lack of bank credit stopping firms from moving into more profitable niches, and this is one reason why the BoE launched its so-called Funding for Lending Scheme in August, which offers banks cheap finance.

But other officials, such as former BoE policymaker Adam Posen, have played down the idea that the financial crisis permanently damaged the productive capacity of British workers, and that this would be enough of a reason to hold back stimulus.

And David Miles, the only MPC member to back more asset purchases, argues that productivity itself is artificially depressed by low demand, and will pick up when growth returns.
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.99
-0.3%
Rand - Pound
24.07
+0.2%
Rand - Euro
20.60
-0.0%
Rand - Aus dollar
12.36
+0.5%
Rand - Yen
0.13
+0.7%
Platinum
901.37
-0.1%
Palladium
1,000.53
-0.6%
Gold
2,153.18
-0.3%
Silver
24.93
-0.5%
Brent Crude
86.89
+1.8%
Top 40
65,876
-0.6%
All Share
72,094
-0.5%
Resource 10
53,201
-0.2%
Industrial 25
99,443
-1.0%
Financial 15
16,630
+0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders