British productivity growth could give economists a pleasant surprise in the coming years, according to a top policymaker at the Bank of England.
Silvana Tenreyro, an external member of the interest rate-setting monetary policy committee (MPC), said she believes the so-called productivity puzzle could be resolved as laggards – including the financial sector – finally pick up some speed.
The resolution of some uncertainty and the Bank’s forecasts of a real wage pick-up give “grounds for optimism” in the medium term, although productivity growth is unlikely to pick up to pre-financial crisis levels, Tenreyro said at a speech given this evening at the Queen Mary University of London.
A more bullish stance on productivity could lead to a faster increase in interest rates, above the two rate hikes currently implied by market expectations used in Bank of England forecasts.
The last forecasts were made in November, when the MPC raised interest rates for the first time in a decade. Tenreyro was among the seven economists who voted in favour of the hike, with two voting against.
In an unusually upbeat assessment from a Bank of England official, Tenreyro predicted that productivity will pick up as the financial sector finishes a drawn-out process of deleveraging and manufacturers start investing, supported by strengthening global growth.
The finance and manufacturing sectors were responsible for the lion’s share of the fall in productivity growth in the last decade: finance and insurance productivity growth fell by 0.6 percentage points after the crisis, Tenreyro's analysis shows.
“A concentrated slowdown in some industries might suggest idiosyncratic causes that call for more targeted solutions,” she said.
The finance sector’s sluggish productivity growth since the crisis may have been caused by the overuse of leverage in the years before 2007, which sucked workers and money to finance. The unsustainable debt build-up funding the City’s pre-crisis productivity boom may then have necessitated a long period of deleveraging, Tenreyro said.
However, “those processes have largely run their course,” Tenreyro said, in a development which may give “a helpful boost to productivity growth”.
Weak productivity growth across developed economies has confused economists, as repeated predictions of an acceleration back to levels before the financial crisis have failed to materialise.
The productivity of the average British worker doubled in just 30 years up until 2007, but in the decade since then output per hour has increased by a meagre one per cent. The UK's particularly slow rate of productivity growth has dented official economic forecasts, giving the Treasury far less room for manoeuvre as future GDP growth was marked down.
Yet British firms could regain their place at the top if investment starts to increase, Tenreyro insisted – although she added that uncertainty around post-Brexit trade is preventing investment. She said: “Firms in the UK have all the fundamental factors in their favour to be at the technological frontier.”
Read more: How the UK can plug the productivity gap