The UK has spent years fretting about its dismal productivity performance in the wake of the financial crisis, but it’s no closer to figuring out what has gone wrong or what (if anything) should be done about it.
Perhaps it should look further afield. The UK is not the only place with a “productivity puzzle” on its hands: New Zealand is scratching its head too. For a developed country with seemingly supportive policies on tax, regulation and education, New Zealand’s workers are surprisingly unproductive, and they don’t seem to be improving very quickly either.
Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.
Britain is back in recession – gross domestic product fell by 0.2 per cent in the first quarter of this year – following a 0.3 per cent fall at the end of 2011. What should we make of the figures?
1. Is this a deep recession?
No. It is nothing like 2008-09 when output dropped 7 per cent over five quarters. In truth, as Joe Grice, chief economist of the Office for National Statistics said, the economy has been broadly flat since the third quarter of 2010. Some quarters up a bit, the others down. The level of output is now measured at an index number of 98.1 (2008=100) and it was 98.3 in the autumn of 2010.
Martin Weale’s speech today shows how far the policy debate has shifted at the Bank of England. As recently as early July, this external member of the monetary policy committee was voting for higher interest rates. Now he is openly talking about restarting quantitative easing.
Mr Weale should certainly be praised for being as good as his words. In March he said he was perfectly happy to change his mind if the facts changed and he has done so. No longer voting for a rate rise does not indicate a previous error of judgment, only that circumstances have changed.
From his speech today, Mr Weale, one of the more hawkish MPC members, now clearly thinks that UK QE2 might be necessary and he believes it would work.
What was that infamous “Jo Moore” phrase again?
Yesterday certainly was “a good day to bury bad news”. As all eyes were focused on the News of the World phone hacking scandal, the government slipped-out an announcement that its preferred candidate for the new chair of the UK Statistical Authority withdrew her candidacy.
MPs were not convinced Dame Janet Finch, a paid up member of the non-executive great-and-the-good, she was sufficiently independent to be an effective watchdog over official statistics and ministerial spinning of data. The good news for all those interested in clear official data and wider access to information held by government is that the next candidate put forward by government must know they are there to serve the public not the government.
This creates the possibility of a new dawn for UK statistics. all areas including monetary policy will be more transparent and, even if pre-release of data to ministers is curtailed, the Bank of England is unlikely to find its job of controlling inflation compromised.
What was wrong with Ms Finch? She gave a shocker of an interview to MPs last week.
Jean-Claude Trichet spoke at the LSE on Monday afternoon.
Much of what he said was a combination of a couple of speeches he gave last week, the central message being that the eurozone needs to monitor member countries’ fiscal and macroeconomic policies and competitiveness more closely, and that there needs to be a sharper stick with which to beat countries that fail to behave themselves.
The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has.
Charlie Bean, deputy governor of the Bank of England, has been seen as one of the swing voters on the Monetary Policy Committee. If he is one of the people who would have to vote for a rate rise, he does not seem like he is itching to pull the trigger any time soon.
In the speech he has just delivered in Northern Ireland, he thinks the signs of limited supply capacity and poor productivity is nothing more worrying than “puzzling”, he notes that there are persistent output losses after banking crises, is not too concerned about inflation or inflation expectations, but sounds most upset about the weakness in demand at the moment.
Worries about demand weakness with puzzlement about supply is not what constitutes a rate hiker. That rate rise might be on hold a bit longer.
Ben Broadbent, the new member of the Bank of England’s Monetary Policy Committee, is just about to start his confirmation hearing in Parliament (more later). But he will have to deal with today’s inflation figures for April, which have pushed CPI inflation up to 4.5 per cent from 4 per cent in March as shown in the picture.
But though Mr Broadbent did not know the following, he had little need to worry. The April CPI is heavily distorted by the timing of Easter and its effects on air fare prices. Some 0.36 percentage points of the 0.5 percentage point rise in inflation has come from air fares.
Late in the day, the Bank of England has just slipped out a press release revealing that one member of the new Financial Policy Committee has decided not to take the job.
Richard Lambert, former head of the CBI employers’ organisation and editor of the Financial Times, says the post would cramp his stlye:
“Since leaving the CBI I have spent a period away from work and on reflection I have decided, with great regret, that I do not wish to take up my position as an external member of the Bank of England’s interim Financial Policy Committee. I wish to devote my time to a wider range of aspects of public policy. And membership of the committee could place constraints on my ability to do so. Mervyn King, the Governor ofthe Bank, has been very understanding about my change of plans. I wish the committee every success inthe important work which lies ahead of it.”
I have just spoken to Mr Lambert