Disruptions to the banking system may be undermining the productivity of British companies and could be one reason why output growth is so sluggish, according to the Bank of England’s chief economist.
In remarks prepared for an address to manufacturers in South Tyneside, Spencer Dale, who is also a member of the Bank’s rates setting body, said the fall in productivity had been particularly worrying. Productivity – defined as output per worker – still stands lower than it was at the start of the financial crisis. Had it continued to grow at its pre-crisis rate, it would now be about 9 per cent higher.
“Productivity matters for monetary policy since it plays a crucial role in determining the supply capacity of our economy,” Mr Dale said. “The balance between an economy’s capacity to supply goods and services and what is actually demanded is a fundamental driver of inflationary pressure in the medium term and so central to the monetary policy committee’s task.”
Mr Dale said the reason that output in Britain was growing so slowly might not just be because demand for goods and services was so weak. Businesses’ ability to supply goods and services may also have disappeared.
Mr Dale focused on “total factor productivity” which takes account not only of person-hours worked but drivers such as technology and innovation that enable companies to step up the pace at which they produce goods and services.
Mr Dale noted that the recent recession was different from others because it began in the financial sector, which even now was not working properly. Small companies in particular are struggling to obtain credit.
“The implications of this for the efficiency with which companies operate are particularly far-reaching,” Mr Dale said, noting that businesses employing fewer than 100 employees, and which account for less than 20 per cent of business investment, still hold 40 per cent of all patents.
Mr Dale added that the restricted ability of companies to borrow money to invest, and the higher prices that banks were charging, was likely to have impeded the efficiency of supply. This causes companies to hang on to their cash rather than invest it in research and development or in staff training.
It has also made firms cut back on inventories, disrupting their usual supply chains and has led them to spend much more time trying to manage their finances rather than build new business opportunities.
“It is impossible to quantify with any precision the effect that strains within the banking system have had on the growth of productivity over the past few years,” Mr Dale said. “But evidence from previous periods of financial turmoil suggests that the effect might be material.”
Separately, Mr Dale, who as an MPC member had voted to raise interest rates every month between February and July, said that he changed his mind at the August and September meetings because there was considerable evidence that the global outlook for demand had weakened considerably in recent months.
Moreover, there is ebbing confidence that authorities worldwide can respond to challenges, particularly those that may destabilise banking systems. “These factors have fed on each other, leading to a downward spiral,” Mr Dale said.