Central Banks Seeking to Spur Supply Side Miracle Come Up Short

Central bankers’ experiment with zero interest rates is falling short on the supply side of their economies.

Productivity and labor-force growth are failing to accelerate despite policies Bank of England GovernorMark Carney said should deliver the economic growth needed to generate “supply-side improvement.”

“Weaker supply-side performance may dampen the enthusiasm of developed-market central banks to experiment with their growth/inflation trade-off to elicit strong supply,” JPMorgan Chase & Co. economists led by Bruce Kasman said in a July 4 report.

The argument of policy makers was that a by-product of promoting demand would be an expansion in their economies’ capacity. The theory went that if low interest rates boosted growth then that would encourage the corporate investment needed to lift productivity or the hiring necessary to draw disgruntled jobless back into labor markets or turn part-time positions into full-time ones.

“Central banks can affect people’s decisions about how much to work and firms’ decisions about how much to invest,” Carney said in December.

Doing so should help damp inflation, handing the monetary authorities even more time to focus on aiding growth. The problem is that if the supply-side doesn’t improve, then prices risk accelerating at a weaker level of expansion, requiring earlier interest-rate increases.

‘Depressed Activity’

The plan doesn’t seem to be working and a slide in supply has “depressed activity enormously relative to its pre-financial crisis trajectory,” say the JPMorgan economists.

Labor supply grew just 0.3 percent globally over the year through the first quarter. That compares with a 0.9 percent annual average from 2002 to 2007. Europe’s labor supply even shrank 0.3 percent, while the U.S.’s 0.2 percent increase lagged its 2002 to 2007 trend of 1.1 percent.

Productivity is still sluggish too, averaging growth of just 0.9 percent globally over the past year, well below the 1.7 percent of 2002 to 2007. The U.S. rate has sunk to 0.4 percent from 2 percent.

Kasman’s team sees the phenomenon in how global unemployment fell 0.5 percentage points in the six months through April, led by a 1.1 point slide in the U.S. While a declining jobless rate is usually good news, it’s less so if driven by workers leaving the labor market or those in work aren’t that productive.

International Monetary Fund Managing Director Christine Lagarde has warned the Washington-based lender may cut its forecast for 3.6 percent expansion this year in part because the non-inflationary, or potential, growth rate is weaker.

“Both labor supply and productivity tend to be pro-cyclical and can be expected to improve along with stronger growth,” said the JPMorgan economists. “However, the perception that underlying supply trends are deteriorating is heightening.”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net Andrew Atkinson

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