UK "underlying growth has stopped" according to a commentary on this week's UK Budget by the chief economics commentator of the Financial Times.
Martin Wolf writes today that both the government and the opposition Labour party have not recognised that the financial crisis both revealed and caused structural weaknesses in the British economy.
Wolf says that the economy is “ex-growth” — underlying growth has stopped and in this context the goal of George Osborne, the chancellor “'for Britain to become the most prosperous major economy in the world' is absurd."
Real GDP (gross domestic product) per head at the end of 2014 was similar as at the end of 2006; real GDP per head at the end of 2014 was about 16% below pre-crisis trend growth and GDP per hour was about 15% below the pre-crisis trend.
He said: "This productivity collapse is why employment has been so buoyant. But now that unemployment has fallen to 5.5%, nearly all future growth depends on a productivity resurgence."
The UK “grew faster than any other major advanced economy in the world last year [. . .] and seven times faster than France,” said George Osborne on Wednesday, adding that, between 2010 and 2013, more jobs were created in Yorkshire than on the other side of the English Channel.
It added: "productivity growth will pick up slowly to more normal rates, but that remains the most important and uncertain judgement in our forecast. It drives our expectation that real wages (specifically our estimate of the ‘real consumption wage’) will return to their pre-crisis peak by late 2018 — sooner than we expected in December, thanks in part to the boost to real wages associated with lower oil prices."
In effect the OBR experts are keeping their fingers crossed: "since it is difficult to explain the abrupt fall and persistent weakness of productivity in recent years, it is also hard to judge when or if productivity growth will return to its historical average."
Prof David Blanchflower, a former member of the Bank of England's Monetary Policy Committee wrote last January: "It is hard to see how productivity would rise in the face of spending cuts that Mr Osborne outlined in his Road to Wigan Pier Autumn Statement, cuts which are unprecedented in living memory. The OBR said “total public spending is now projected to fall to 35.2 % of GDP by 2019-20, taking it below the previous post-war lows reached in 1957-8 and 1999-2000 to what would probably be its lowest level in 80 years”. More of the same won’t fix it. [ ] Productivity measured in terms of output per hour by sector and the story is broadly the same for economy as a whole. Manufacturing output per hour has increased in each of the latest four quarters and was 5.2 % higher than a year earlier in Q3, the fastest rate of increase since 2010. But it is still only up 2 % since 2011.
On Wednesday, George Osborne drew back a little from the Orwellian scenario but there are no clear answers to what the Bank of England in a paper in 2014 called The UK productivity puzzle.
The authors concluded: "Factors related to the nature of the financial crisis are likely to be having a persistent impact on the level of productivity — but there remains considerable uncertainty around any interpretation of the puzzle."
"There are some who advise us to abandon our plan and pursue the French approach", said George Osborne in his Budget speech. But is the French economy performing that badly compared with the UK? Business Editor Sarah Gordon looks at France's productivity results with Executive Editor Hugh Carnegy.
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