The Bank of England is starting to get real on Britain's productivity crisis

The Bank of England’s latest assessment of the UK economy, the Inflation Report, was just released.

The central bank cut its GDP forecast for the year – the UK is now expected to grow by 2.25% instead of 2.5% as expected in February.

That’s because the Bank of England is (bold) finally (end bold) starting to get real about the UK’s dismal productivity situation.

The Bank cut its forecast for productivity growth this year to 0.25% from 0.75%, and for next year from 1.5% to 1.25%.

These are more realistic figures – but they may still be too high. Even in 2016 the Bank expects productivity growth of just 1.75%, significantly below the 2.75% average in the ten years running up to the crisis.

That’s got a knock-on effect for wages – the Bank has now abandoned its very optimistic 3.5% forecast for wage growth this year, snipping that to 2.5%. Household consumption got a similar treatment, with a forecast cut from 3.75% to 2.75% this year.

That’s down to this:

Job growth in recent years has been extremely strong, but it’s due in significant part to high and medium skilled jobs.

That’s good news, contrary to some pessimistic sniping. Unemployment is bad for the economy and can be awful for the long-term prospects of the individual unemployed people.

But unemployment isn’t going to go on falling forever, and at some point the UK’s growth will have to come from somewhere else if it’s to continue. That somewhere should be productivity – some sort of rebound is crucial for the country.

Here’s the section of the report that should worry people:

“It’s possible that some of the factors associated with the financial crisis may be having a persistent impact on total factor productivity (TFP) growth. For example, forbearance and a low level of Bank Rate could have allowed businesses that face persistentlyā€ˇ lower demand to remain operation…

“Weaker investment not only in physical but also ‘intangible’ capital such as employees’ skills, may have reduced the pace of innovation and hindered companies’ ability to adopt more innovative processes. Indeed, Bank staff analysis suggests that TFP has grown more slowly than in some other advanced economiesā€ˇ, notably the United States.”

Those suggestions aren’t the Bank’s central forecast, but if they’re true the UK has big problems that Mark Carney cannot solve.

There’s still very little concern about deflation for the UK. The Bank says the possibility of “adverse consequences” like delayed consumption and increased difficulties in paying off debt are “highly unlikely” for the UK, noting that if they thought it was likely they have “the tools to bring inflation back to target,” meaning that they’re not afraid to turn the QE taps back on if necessary.

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