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April 1, 2014 11:24 am
Meagre growth in workers’ hourly output has highlighted Britain’s dire productivity and fuelled debate over how long interest rates can remain at their record lows.
Output per hour rose 0.3 per cent between the third and fourth quarters of last year, as the economy expanded slightly faster than the number of hours people worked. However, the growth rate was still very weak by historical standards.
“It was a small pick up in productivity, one that disappointed even my pessimistic expectations,” said Philip Rush, an economist at Nomura.
The dark side of Britain’s rapid employment growth in recent years has been a steep decline in productivity. Output per hour is about 3 percentage points below where it was in 2008 and about 21 percentage points below the average for the rest of the major G7 industrialised economies, the widest such gap since 1992.
What happens to productivity now the economy is recovering is critical for monetary policy: if it bounces back, wages will be able to rise without fuelling inflation, allowing the Bank of England to leave rates low for longer.
It is also crucial for fiscal policy, since higher productivity growth would allow a longer and more rapid economic expansion, which would help to improve the deficit without more tax increases and spending cuts.
Economists and policy makers – who call this the “productivity puzzle” – disagree fiercely about why output per hour has plunged and whether or not it will recover.
The BoE became more pessimistic about productivity in February, after it was caught off-guard by strong employment and weak output per hour data. It now thinks there is less scope for rapid productivity growth, but still believes it will recover gradually to its pre-crisis growth rate of about 2 per cent a year.
Mr Rush is more pessimistic. “We see no reason to expect a return to pre-crisis trend rates of productivity growth,” he said. He believes the drop reflects specific and permanent shocks to the UK’s utilities and financial services sectors. “There is no puzzle, there’s just bad economics and bad economists,” he said.
Because he thinks productivity growth will remain weak, he believes higher wage growth will push up unit labour costs and force the BoE to raise rates in November.
At the other end of the spectrum, Samuel Tombs at Capital Economics is an optimist. He thinks companies are about to start investing, which will improve productivity and allow the BoE to keep rates on hold until the end of next year.
“I think there’s every reason to expect a . . . cyclical bounce back in productivity over the next few years,” he said. “Today’s figures aren’t brilliant but they are a step in the right direction.”
He pointed to the manufacturing sector – where output is still about a tenth below its peak – as a sector ripe for productivity gains.
Separate data on manufacturers on Tuesday showed activity in the sector increased for the 12th consecutive month in March, but the pace slowed notably.
The Markit/CIPS purchasing managers’ index was 55.3 in March, down from 56.2 in February. This was more than a full index point below the market’s expectations of 56.5. A reading above 50 indicates expansion.
Simon Wells of HSBC warned there was a long way to go.
“It will still be some time before it [manufacturing] reaches 2008 levels despite the recovery in the wider economy,” he said. “The UK may be looking at a lost decade of manufacturing growth.”
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