It is likely that growth in the UK’s productivity has accelerated in recent years and is growing faster than official statistics suggest, a Bank of England policymaker said on Thursday.
Silvana Tenreyro, an external member of the Bank of England’s monetary policy committee, said analysis of the data suggested productivity growth had picked up since 2014, potentially leaving the UK economy with excess capacity.
“Smoothing through some of the volatility, there is some evidence of a mildly improving trend emerging,” Ms Tenreyro said in Glasgow. Annual productivity growth had increased from 0.4 per cent between 2010 and 2014 to 0.6 per cent during the following four years.
“Moreover, early estimates of [output] are typically revised up over time,” she said, adding that Bank of England economists predict that growth in output per hour increased even faster, to 0.8 per cent per year, between 2014 and 2018.
Productivity growth has been the missing piece of the UK’s economic recovery since 2008. It has been blamed for low wage growth and, until recently, slow growth in tax receipts since the financial crisis.
The Bank of England last year justified moves to raise interest rates in a belief that weak productivity growth meant the UK economy was growing faster than its underlying capacity to provide goods and services.
In February the central bank retreated from its plans for multiple rate rises and cut its outlook for growth, blaming uncertainty around Brexit and a slowing global economy.
However, on Thursday, Ms Tenreyro said that faster productivity growth may be one reason why recent inflation data had consistently come in below the central bank’s forecast.
Companies cutting their profit margins in the face of competition could be another explanation, she said, or a weak housing market and falling rental costs since the Brexit vote.
“Irrespective of the mechanism, the evidence from the inflation data suggests to me that supply has been growing in line with demand over the past couple of years, if not slightly faster,” she said.
“While I still envisage that in the event of a smooth Brexit we will need a small amount of tightening over the next three years, before voting for any rate rises I would want to be confident that demand was growing faster than supply,” she said.
“As I have discussed today, to be most sure of that I would need to see an increase in domestic inflationary pressures.”