The Obr, Productivity Together With Policy Failures

Chris Giles had an article inwards the FT yesterday almost the UK’s continuing dreadful productivity performance, in addition to the implications this mightiness receive got for forecasts of the populace finances. It has the next nautical chart comparison successive OBR forecasts in addition to actual data.

I desire to brand 2 points almost this. The outset is almost the OBR’s forecast. [1] It is slow to state looking at this nautical chart that the OBR has for a long fourth dimension been foolishly optimistic almost United Kingdom of Great Britain in addition to Northern Ireland productivity growth. Too oftentimes growth was expected to supply to its long run tendency shortly afterward the forecast was published but it failed to do so. Expect lots of articles almost how hopeless macro forecasts are inwards general, or perchance how hopeless OBR forecasts are inwards particular. It was obvious, these articles mightiness say, that tendency productivity growth inwards the United Kingdom of Great Britain in addition to Northern Ireland has taken a permanent striking next the fiscal crisis.

Anyone proverb this is ignoring the history of the United Kingdom of Great Britain in addition to Northern Ireland economic scheme for the 50 years earlier the GFC. After each downturn or recession, labour productivity growth has initially fallen, but it has inside a few years recovered to supply to its underlying tendency of around 2.25% per annum. This way non simply returning to growth of 2.25%, but initially exceeding it equally productivity caught upwardly alongside the ground lost inwards the recession. In a nail sometimes growth exceeded this tendency line, but it presently roughshod dorsum towards it.

This made sense. Productivity growth reflects technical progress in addition to innovation, in addition to they tend to driblet dead on despite recessions. H5N1 theater may non last able to implement innovations during a recession, but 1 time the recession is over sense suggests they brand upwardly for lost ground inwards damage of putting innovations into practice.

Given this experience, OBR forecasts receive got ever been pretty pessimistic. They receive got assumed a supply to tendency growth, but no grab upwardly to brand upwardly for lost ground. If they had besides forecast, inwards 2014 say, that given recent sense they expected productivity growth to last almost apartment for the adjacent 5 years that would receive got been regarded equally extreme at the time. Why would United Kingdom of Great Britain in addition to Northern Ireland firms driblet dead on to ignore productivity enhancing innovations when the macroeconomic outlook looked reasonable?

And of course of report inwards 2014 United Kingdom of Great Britain in addition to Northern Ireland productivity growth was positive. This brings me to my minute point, which follows from this quote from the FT article:

“In the Budget, both the OBR in addition to Mr Hammond are probable to stress that the downgraded forecasts do non reverberate a novel assessment of the impairment to the United Kingdom of Great Britain in addition to Northern Ireland economic scheme from Brexit, but a reassessment of probable productivity growth afterward thence many recent disappointments.”

Chris may last correct that they volition state this, but is it remotely plausible? As my recent post tried to suggest, United Kingdom of Great Britain in addition to Northern Ireland productivity growth tin terminate last seen equally suffering from 3 large shocks: the recession next the GFC, the absence of a normal recovery equally a termination of austerity, in addition to and thence Brexit. The outset 2 of those shocks led to a menstruum of intense uncertainty, causing United Kingdom of Great Britain in addition to Northern Ireland firms to seat on concord whatsoever plans to innovate. Just equally they idea things had returned to a subdued version of normal they were striking yesteryear the third, Brexit. During periods of intense uncertainty, productivity stalls or may fifty-fifty decline a little, equally firms come across whatsoever growth inwards need yesteryear increasing occupation but non investing inwards novel techniques. [2]

This flush involving dubiety seems to represent the data. Once the recovery (of sorts) in conclusion began inwards 2013, productivity growth picked up. That sustained growth came to a stop when the Conservatives won the 2015 election, in addition to the possibility of Brexit began to last an of import element for firms. [3]

These 2 points are related inwards the next way. The sense of the 50 years earlier the GFC suggested that you lot could striking the economic scheme alongside pretty large hammers, but it would eventually bounce back. However that may receive got been contingent on a belief yesteryear firms that if policymakers were wielding the hammer (using high involvement rates for example) they would receive got it away fairly soon, in addition to supersede it yesteryear stimulus. That belief was shattered inwards the United Kingdom of Great Britain in addition to Northern Ireland yesteryear the GFC in addition to austerity, where policymakers decided to maintain using the hammer. What footling confidence remained was destroyed yesteryear Brexit.

Discoveries are all the same last beingness made inwards universities around the world, in addition to nosotros know innovations are all the same beingness implemented yesteryear leading United Kingdom of Great Britain in addition to Northern Ireland firms. It seems completely far fetched to imagine the GFC is all the same having some mysterious behavior on on the residuum of United Kingdom of Great Britain in addition to Northern Ireland firms such that they decline to adopt these innovations. H5N1 much to a greater extent than plausible flush is that nosotros are seeing what happens when most firms lose confidence inwards the powerfulness of policymakers to create out the economy.

[1] I am on the OBR’s advisory panel, but equally our chore when nosotros come across 1 time a twelvemonth is to last critical of OBR assumptions, in addition to equally nosotros receive got no utilisation inwards producing their forecasts, I retrieve what I state hither tin terminate last completely objective.

[2] Productivity tin terminate initially autumn because novel employees are non equally productive equally those who receive got been working inwards the firms for some time, for example.
Postscript (7/10/17) For show on the behavior on of Brexit on productivity, consider run yesteryear Bloom in addition to Mizen here.

[3] An option flush is that the United Kingdom of Great Britain in addition to Northern Ireland has settled into a novel dull growth ‘equilibrium’, where the bulk of firms are thence pessimistic they hardly nowadays at all.