Productivity puzzle solved? Bank of England optimistic on growth

Wages rises should boost investment and efficiency, bank says

The productivity puzzle is a phenomenon that has enveloped British business since the recession.

Economists have various theories to explain why, after 2008, worker output per hour was 15% lower than it was before the crash.

Did low wages lead to low worker productivity, or was it the other way round? Did companies cut back on investments in staff and equipment too much? Did cheap borrowing rates keep many doomed companies afloat artificially? Is it simply lack of innovation?

But now, the Bank of England has said it expects productivity to improve.

Sir Jon Cunliffe, the bank’s deputy governor for financial stability, pointed to a combination of factors that should mean workforces increase their output.

Speaking at a dinner in Luton, Cunliffe said that wage rises will push companies to invest more, and that it expects efficiency, and productivity to rise in accordance.

He also admitted that banks had propped up unsustainable businesses, but that the process was now righting itself.

The large slump in output has hampered the economic recovery, and hit living standards hard.

“For the economy to grow robustly and sustainably over the next few years, productivity growth will need to begin to pick up,” Cunliffe said.

“Even if we can’t fully explain the puzzle, we can I think now point to an alignment of factors that suggest that productivity growth will start to move in the right direction,” he added.

The Bank of England’s forecast is backed up by research from Oxford Economics, which today released research indicating it expects to see rising productivity across the UK.

“At a national level, manufacturing will see strong growth in productivity,” the report says, “rising by 15.5% by between 2015 and 2020, well clear of the UK average of 10.7% over the same time period. Digital & creative industries and professional services also perform strongly. The forecast for manufacturing is particularly encouraging for the sector’s export prospects – with strong productivity growth consistent with growing international competitiveness.”

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Readers' comments (2)

  • Anonymous

    interesting article for linkage of output vs cost to the company. Projection of grownth in manufacturing from current level is encouraging to know.

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