June 23 ,2015 | by Hari Sri

UK productivity growth predicted by Bank of England

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Bank of England deputy governor Jon Cunliffe forecasts improvement in Britain’s productivity as reserve of spare labour runs out.

The solution to Britain’s productivity problem could be just around the corner, according to Jon Cunliffe, the Bank of England’s (BOE’s) deputy governor for financial stability. He predicts that productivity in the UK is set to gradually increase as the economy’s spare labour capacity dries up.

Speaking in Luton, Mr Cunliffe outlined how several factors were aligning to suggest that productivity growth in Britain would resume after eight years of contraction.

"We can, I think, now point to an alignment of factors that suggest that productivity growth will start to move in the right direction over the next few years," Mr Cunliffe said.

UK should see growth in following years

After the global financial crisis hit, the UK saw productivity grind to a halt, and it has barely recovered at all since 2007. Mr Cunliffe noted that British productivity is now around 15% lower than it would have been without the effects of the recession. Furthermore, it is some 30% down from that of productivity in the US, according to official data.

"Unfortunately productivity in the UK has not followed the lead of the car industry,” Mr Cunliffe noted.

“In 2014 labour productivity in the UK was actually slightly lower than its 2007 level. In the seven years between 2000 and 2007 labour productivity grew at an average annual rate of about two% a year. In the seven years that followed, our annual productivity growth averaged just below zero.”

The figures are rather depressing. However, while the BOE believes that productivity will continue to be “pretty weak” in 2015, the UK should begin to see a return to growth in the following years.

A return of high prices and high inflation

Mr Cunliffe explained that Britain’s reserves of spare labour in the jobs market were being used up, which would cause wages to rise as there is less competition for jobs. Companies would then have to invest more to find ways of increasing output without hiring additional staff.

“As the economy grows, spare capacity is used up. The real cost of labour increases relative to the cost of investment. Firms have a greater incentive to find efficiency gains and to switch away from more labour-intensive forms of production. This should boost productivity.”

He cautioned that the Bank of England cannot solve the productivity puzzle, and a number of different scenarios could occur.

One such was the return of high prices and high inflation. If wage growth picked up and productivity stayed low, Britain could see inflation spiral out of control. Then the Bank of England would be forced to raise interest rates in order to combat inflation.

On the other hand, pay growth might not be sustained if productivity growth failed to pick up.

"Indeed, we may never solve the productivity puzzle,” Mr Cunliffe concluded.

Hari Sri

Hari is the LSBF Blog's News Editor. He manages the editorial content on the blog and writes about current affairs, SME, entrepreneurship, energy, education and emerging market news.

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