Bank of England  

Bank's Ramsden on why UK productivity may never improve

Bank's Ramsden on why UK productivity may never improve

Dave Ramsden, a deputy governor of the Bank of England, said the present lower level of productivity growth in the UK may become a permanent feature of the economy.

He said structural changes in the economy, including extra levels of regulation in financial services, combined with political shifts such as the UK's exit from the European Union, mean the long-term level of productivity growth is likely to be around 1 per cent, about half the historic level.

Mr Ramsden said those shifts in the economy are such that central bank policy will not be able to remedy it.  

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Mr Ramsden, the deputy governor for markets and banking at the central bank, was speaking at Babraham Hall in Cambridge on Friday (23 February).

He said the major contributions to the weakness of UK productivity have been changes to the financial services and wider industry.

Greater levels of regulation in financial services mean a larger percentage of staff in financial institutions are engaged in compliance work, he noted.

The productivity of this activity is harder to measure in economic statistics than activity such as selling financial instruments, he said.

This reduces the level of productivity growth in an economy, as measured by official statistics. Financial crashes are also destructive of productivity.

Mr Ramsden said financial services, and manufacturing, have contributed nothing to the growth in productivity seen since the financial crisis.

Tom Slater, joint manager of the £6bn Scottish Mortgage investment trust, has in the past highlighted how the fastest growing companies of today need much less capital than has been the case for companies throughout history.

An example is the automotive industry, with Mr Slater drawing parallels between the way car companies had to expand when that technology was as new as Amazon is today.

He said if a company such as Ford wanted to expand in its early years, it needed to acquire a new factory and machinery.

But companies such as Facebook, which he said is at the epicentre of global growth today, does not need extra physical equipment to expand.

This reduces the level of productivity growth from the manufacturing sector, as measured by official statistics.

Mr Ramsden said there are also cyclical factors keeping productivity growth lower.

He said: "Weakness in productivity relative to pre-crisis isn't unique to the UK.

"Part of that global weakness is likely to reflect weak investment, which fell during the crisis and has only recovered gradually since then.

"The expansion in global trade and broadening of supply chains in the decade prior to the crisis is likely to have been one factor contributing to robust total factor productivity growth during that period. Since then, growth in global trade has been subdued."

He added that monetary policy "cannot offset the economic impacts of a large structural shock like Brexit."

Mr Ramsden said lower productivity growth in the coming years is likely to mean lower inflation, and therefore, interest rates being less than has historically the case.