Outlook is gloomy, but there to be proved wrong

Capitulation! After years of fighting the numbers, the independent Office for Budget Responsibility has slashed its assessment of Britain’s productivity potential, thereby ensuring some of the worst and most sustained official forecasts for economic growth in living memory.

Forecasts are only forecasts, there to be proved wrong. Too often they are a rear-view mirror reflection of the world, and as likely as not, the OBR has changed its mind on productivity just as things are about to change for the better, with output per man-hour surging forward anew. This is indeed what you expect given rapid advances in artificial intelligence and automation – technologies, the Chancellor insisted yesterday, where Britain leads the world. It’s the curse of all official forecasters that they tend to be backward looking, rather than forward, and therefore only useful as contrary indicators. Think the opposite, and as likely as not you’ll be right.

Perhaps unfortunately, the Government must nevertheless bow before their judgments, and tailor fiscal policy accordingly. The great irony is that it was the Tories that gave birth to the OBR, ending an age when the numbers were essentially made up by the politicians to justify the giveaways. Now they must live with the consequences.

It was almost possible to feel sorry for the beleaguered Philip Hammond as he whisked his way through the bad news.

Under attack from all sides, and with a Prime Minister said to be intent on sacking him as soon as she’s able, he did his level best to sound upbeat, positive and inspired, and up to a point he managed it, belying his reputation as the Cabinet’s resident pessimist. The

future would be full of opportunity, he insisted, as he outlining a vision of Britain as a prosperous and inclusive economy, an outward looking, free trading nation, a hub of innovation and enterprise, and a beacon of creativity.

He even managed to loosen the purse strings, with a fiscal giveaway eventually worth £9.2billion a year, including, as a sop to hitherto fiercely critical Brexiteers, £3billion over two years on preparing for Brexit.

But then, like a bucket of cold sick poured all over him, came the OBR’S growth forecasts – 1.4per cent next year, followed by two years of barely growing at all at 1.3per cent, and not much better in the two years thereafter.

This was hardly the sunlit uplands the Chancellor sought to convey. To the contrary, it was quite the most gloomy set of official forecasts ever produced for the UK economy. If it turns out to be right, it would be on a par with the five years that followed the financial crisis.

This at a time when the world economy is beginning to fire on all cylinders and our leading trading partners are bounding away.

But it is not Brexit that has caused the OBR so fundamentally to change its view – that’s taken to be neutral for the purpose of these forecasts. Rather it is a particularly downbeat view of the country’s potential for productivity growth. This is the magic ingredient that causes wages and living standards to rise over time. Without it, prosperity stagnates.

A consistent feature of OBR forecasts ever since the financial crisis is that employment growth has proved far stronger than expected, but productivity growth much weaker. Year in, year out, the OBR has assumed that productivity would soon return to historic norms, but it hasn’t, with hourly output now 21 per cent below an extrapolation of its pre-crisis trend.

Continued subdued investment, low interest rates and a similar pattern of depressed efficiency gain in other advanced economies has led the OBR to conclude that productivity weakness is going to be a more enduring feature of the economic landscape than previously assumed.

There is only so long you can fight the reality, it might be said in the OBR’S defence. But my guess is that its assumptions are wholly wrong. It’s not just the so-called Second Machine Age, with its promise of revolutionising production of goods and services; with the economy at near full employment, it’s also only a matter of time before wage growth comes surging back, forcing companies to cut costs by investing in labour saving technology.

Unhappily for Mr Hammond, it’s a view that for the moment the OBR seems disinclined to take.