Philip Ham­mond must grap­ple with UK’s stalled pro­duc­tiv­ity

The Daily Telegraph - Business - - Front Page - By Tim Wal­lace

BRI­TAIN’S pro­duc­tiv­ity cri­sis is not go­ing to come to an end any time soon.

That is the ver­dict of the Of­fice for Bud­get Re­spon­si­bil­ity (OBR), the of­fi­cial watch­dog of Bri­tain’s govern­ment fi­nances. Pro­duc­tiv­ity is cru­cial to eco­nomic growth and to liv­ing stan­dards – work­ers can be paid more and work less if they pro­duce more out­put for ev­ery hour worked.

But since the fi­nan­cial cri­sis pro­duc­tiv­ity has barely budged. Back in 2010 the OBR pre­dicted pro­duc­tiv­ity would re­sume its pre-crash trend, ris­ing by about 15pc from 2009 to 2016. That did not hap­pen. Each time the OBR made a fore­cast – at the Bud­get or Au­tumn State­ment – it thought the strong old trend rate would pick up. But it did not. Pro­duc­tiv­ity re­mained stub­bornly low. After seven years of per­sist­ing with this, the OBR has thrown in the towel.

“As the pe­riod of his­tor­i­cally weak pro­duc­tiv­ity growth length­ens, it seems less plau­si­ble to as­sume that po­ten­tial and ac­tual pro­duc­tiv­ity growth will re­cover over the medium term to the ex­tent as­sumed in our most re­cent fore­casts,” the watch­dog said. “Over the past five years, growth in out­put per hour has av­er­aged 0.2pc. This looks set to be a bet­ter guide to pro­duc­tiv­ity growth in 2017 than our March fore­cast.”

That paints a gloomy pic­ture for fu­ture eco­nomic growth, pay rises and govern­ment fi­nances ahead of Philip Ham­mond’s Bud­get next month. The re­port notes that “some com­men­ta­tors have ar­gued that ad­vanced economies have en­tered an era of per­ma­nently sub­dued pro­duc­tiv­ity growth for struc­tural rea­sons”. How­ever, the OBR does not quite go that far.

While it does “ex­pect to lower our fore­cast for cu­mu­la­tive po­ten­tial pro­duc­tiv­ity growth sig­nif­i­cantly over the next five years”, it will do so “with­out go­ing so far as to as­sume that there is no re­cov­ery at all from the very weak per­for­mance of re­cent years”.

Per­haps the most wor­ry­ing sec­tion of the re­port looks at rea­sons why pro­duc­tiv­ity growth has been so low. In par­tic­u­lar, it ex­am­ines the fac­tors that were once thought to be be­hind the weak per­for­mance and have been fixed, only to find they were not to blame after all.

“In the im­me­di­ate post-cri­sis pe­riod, labour hoard­ing in the face of tem­po­rar­ily weak de­mand was a plau­si­ble hy­poth­e­sis,” the OBR said, as com­pa­nies could keep on staff but work them less hard un­til de­mand re­cov­ered. “But that [the­ory] be­came less ap­pro­pri­ate once firms be­gan hir­ing again.”

An­other plau­si­ble can­di­date was the bank­ing sys­tem. Banks were in fi­nan­cial trou­ble and lend­ing dived. Yet the sec­tor has long since re­cov­ered, but pro­duc­tiv­ity has not picked up.

“More re­cently, as the labour mar­ket has tight­ened, with the un­em­ploy­ment rate now at its low­est since the early Seven­ties, up­ward pres­sure on wage growth was ex­pected to en­cour­age firms to economise on labour and to

‘Moves by the Fed should test the idea that low in­ter­est rates are partly to blame for low pro­duc­tiv­ity’

push through pro­duc­tiv­ity im­prove­ments, but that has yet to hap­pen,” the OBR said. Of­fi­cials still have some po­ten­tial can­di­dates. Weak busi­ness in­vest­ment could be to blame.

Cap­i­tal in­vest­ment lev­els have risen sharply since their low point in the fi­nan­cial cri­sis, though are still only around 5pc above pre-crash lev­els.

Al­ter­na­tively there is the so-called “zom­bie firms” the­ory. “The ab­nor­mally low level of in­ter­est rates could also be weigh­ing on pro­duc­tiv­ity growth by al­low­ing weak and highly in­debted firms to sur­vive for longer than they nor­mally would, by al­le­vi­at­ing the bur­den of ser­vic­ing their debts,” the OBR said. Un­cer­tainty fol­low­ing the Brexit vote could also have dented in­vest­ment, though this prob­lem ex­isted long be­fore June 2016.

The puz­zle is a global one. Pro­duc­tiv­ity growth has been dis­ap­point­ing across much of the de­vel­oped world. At least the global na­ture of the prob­lem al­lows for more “cures” to be at­tempted. The US is cur­rently en­gaged in mone­tary tight­en­ing. In­ter­est rates are ris­ing and quan­ti­ta­tive eas­ing will soon start to be wound back.

The move by the Fed­eral Re­serve should be­gin to test the idea that low in­ter­est rates are in part to blame for low pro­duc­tiv­ity.

At some point the the­ory around em­ploy­ment will surely have to be tested. Un­em­ploy­ment has fallen well be­low its pre-cri­sis lev­els, and the num­ber of part-time work­ers who want more hours is on a down­ward trend. Even­tu­ally firms will be forced to boost pay or in­vest more if they want to grow, as they will not be able to find the work­ers they need.

At least ever-fall­ing un­em­ploy­ment is not the most painful way to test the mys­ter­ies of the mod­ern econ­omy.

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