Its a Mystery

28 Jun 2014 9:49 AM | John Heap (Administrator)

British productivity was growing steadily if slowly in the years before the financial crisis struck but it’s now some 16% below its pre-crisis level. 

The Bank of England has published a paper in their  quarterly bulletin of economic research, examining the competing explanations for the productivity puzzle and has a stab at estimating how much of that 16% shortfall they can account for. At best, the authors suggest they can explain about nine percentage points, but it is clearly a mystery beyond their easy solution.

The bank says errors in measuring output probably account for about two percentage points of the shortfall. A decline in the output of once highly productive sectors, such as oil and finance, might account for another two percentage points.

The paper goes on to suggest that  another three to five percentage points of the shortfall may reflect problems that are the legacy of the financial crisis. These include the idea that damaged banks have struggled to reallocate scarce capital away from “zombie” firms with poor prospects and few customers and towards more productive firms with big ambitions. Cyclical factors  such as idling workers and production lines probably also account for part of the productivity shortfall, but the authors say it’s hard to say how much.

Perhaps this mystery will unravel over the next few months - the UK certainly has to hope this is a mystery and not an early sign of a real collapse.

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