U.K.'s Fiscal Watchdog Gives Hammond a Pre-Budget Headache

  • OBR says productivity growth has consistently disappointed
  • Says initial post-crisis explanations don’t tell full story

The U.K.’s fiscal watchdog said it will probably cut its forecasts for productivity growth again and that years of disappointing figures mean it’s no longer enough to blame the financial crisis.

In an evaluation of its own projections, the Office for Budget Responsibility said previous predictions for a productivity pickup were based on an expectation that the post-crisis period of weakness probably reflected temporary influences. But growth has averaged just 0.2 per cent over the past five years, compared with 2.1 percent before 2008.

The “hiatus in productivity growth” has now lasted for almost a decade and some of the earlier explanations seem less applicable today, the OBR said on Tuesday, citing labor hoarding and an impaired banking system during the recession.

It said weak business investment and what it called the “abnormally low” level of interest rates remain relevant in assessing why U.K. productivity remains so weak.

The OBR’s forecasts in March assumed that trend productivity growth would rise slowly to reach 1.8 percent in 2021. It will update the predictions for Chancellor Philip Hammond’s budget in November, and said Tuesday that it will probably offer a more pessimistic view.

That has negative implications for the outlook for economic growth and the public finances, potentially leaving Hammond a significantly smaller fiscal margin to cushion the economy against any Brexit fallout.

‘Significant’ Reduction

“While we continue to believe that there will be some recovery from the very weak productivity performance of recent years, the continued disappointing outturns, together with the likelihood that heightened uncertainty will continue to weigh on investment, means that we anticipate significantly reducing our assumption for potential productivity growth over the next five years,” the OBR said.

A downgrade to potential productivity would imply the economy has less room to grow unless the supply of labor increases, which may be unlikely given that unemployment is at its lowest in four decades and the government plans to impose immigration curbs after Brexit.

Productivity has been a “longstanding challenge” and the government is addressing the issue by investing billions of pounds in infrastructure, research and housing, the Treasury said in a statement.

The OBR added that the “productivity puzzle” is not just a U.K. phenomenon and noted some analysis that advanced economies have entered an era of “permanently subdued productivity growth for structural reasons.”

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