The Office for Budget Responsibility's warning over zombie firms and Britain's productivity crisis is the latest sign that interest rates are finally set to rise

 
Julian Harris
Follow Julian
BRITAIN-POLITICS-ECONOMY-FINANCE-BOE
Governor Mark Carney will reveal the Bank of England's latest decision on 2 November (Source: Getty)

It's always nice when economists draw attention to their own errors, so consider our hat doffed to the folks at the Office for Budget Responsibility who have highlighted their persistent failure to foresee the UK's productivity crisis.

The OBR, an independent body tasked with keeping an eye on the government's fiscal performance, paints a bleak picture of the last six to seven years. Despite decent GDP growth and impressively low levels of unemployment, British productivity – the output we produce for every hour worked – has barely improved at all since 2011.

Time after time the OBR has predicted an imminent and significant improvement in UK productivity, only to be proven depressingly wrong by the official data.

The OBR is hardly the only group to have got this wrong, and its explanations are reasonable. In the years following the financial crisis, with unemployment still low, it was fair to assume companies were keeping hold of staff with the intention of giving them more work to do once business picked up. Equally, many of us expected low unemployment to lift wages and force companies to demand more from their staff. It seems neither outcome has materialised.

Theories behind the UK's productivity crisis (it is a crisis because, without better productivity, it's difficult to see Britons becoming any better off) are numerous, but the OBR has now thrown its weight behind one suspicion that has lingered for some time – namely, that the "abnormally low level of interest rates could be... allowing weak and highly indebted firms to survive for longer than they normally would."

Read more: Even more puzzling: UK productivity is now 15 per cent below the G7 average

The statement adds more pressure on the Bank of England to raise rates beyond their ultra-emergency levels of 0.25 per cent at the upcoming "Super Thursday" three weeks from now.

It comes on the back of an admission by the Office for National Statistics earlier this week that it had underestimated the pace of climbing labour costs, which was also likely to have raised eyebrows on Threadneedle Street.

The Bank's job remains unenviable: it must foresee inflationary pressures ahead of time while being careful not to rock the UK's still precarious economic recovery. However, yesterday's OBR statement is just one of many reminders of the potential unintended consequences stemming from a decade of historically-low rates.

Britain's economic outlook may be murky but in the absence of a clear "emergency", our monetary position should not be anchored at such an exceptionally low rate.

Read more: Davis and Barnier must end their stalemate over Brexit talks

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles