In his prepared statement, Bank of England Governor Mark Carney said: “Among the many uncertainties we face, the timing and extent of any prospective pick-up in productivity growth remains our most difficult judgement.”
According to the Bank: “MPC’s best collective judgement is that slack is broadly in the region of 0.5% of GDP and that supply growth is likely to pick up over the forecast period, reflecting a revival in productivity growth. But there is considerable uncertainty around the current degree of slack and its likely evolution, and a wide range of views on the Committee.”
Productivity has been poor across the developed world since around 2010, when the globe began to haltingly emerge from the financial crisis. But, there remains confusion as to the reason for its persistent weakness.
On the one side there are those like Johns Hopkins’ Lawrence Ball and Larry Summers who posit the notion that the global financial crisis has permanently damaged the prospects for productivity and on the other there are those, like Canaccord Genuity strategist, Robert Jukes, who believe it is more the result of secular stagnation, that while productivity is likely to remain lower for longer, it will ultimately recover.
“If there is secular stagnation then it is right for policy makers to hold back on raising rates, to wait to see the whites of inflation’s eyes, so to speak, before starting to react. And if they do not hold on longer than they normally would they risk damaging what is a very fragile recovery,” Jukes says.
“But, if long-term growth really has been damaged and productivity is structurally lower than it has been, then rates need to start rising earlier because inflation is going to be more of a problem at lower levels of growth.”
Speaking on the Brewin Dolphin podcast, Stephanie Flanders, chief market strategist for Europe at J.P. Morgan Asset Management said, it could well be that we are in a permanently lower productivity growth world but, she said: “That is a pretty seismic thing to say when the most reliable trend we have had in the UK for 100 years is 2% to 2.2% productivity growth a year. To just say overnight that that is gone doesn’t feel like enough of an explanation.”
For Peter Elston, CIO at Seneca Investment Managers, it is the reasons cited by the BoE for the decline in productivity that make for interesting reading:
“First, employment growth has been more concentrated in lower skilled jobs that tend to be associated with lower levels of value added per hour i.e productivity.
“Second, the process of creative destruction in which weak companies go bust – and new, dynamic companies take their place – has been impeded by low interest rates and forbearance.
“Third, weaker investment in employees’ skills may have reduced the pace of innovation. These are all worrying, but if ever there was a good reason to increase interest rates other than too-high inflation, the second is it,” he said.
While it is uncertain yet which camp is going to be proved correct, it is clear that definite trends are going to emerge from within the data, and until then, it is likely that, as Jukes believes, the biggest risk is going to remain a policy mistake.
