BoE's Ramsden sounds positive, but cautious, note on productivity outlook

Productivity growth picked up in the back half of last year, yet whether that improvement will stick remains to be seen, although it's not all bad news in terms of the outlook for further improvement, a top Bank of England official argued.

In remarks prepared for a speech in Cambridge, the BoE's David Ramsden cautioned that recent volatility in productivity data clouded the outlook for growth in the economy's so-called speed limit.

"Productivity growth picked up during the second half of 2017, but due to the recent volatility from one quarter to the next, we'll have to wait and see whether the pickup is sustained in the near-term," the BoE's Deputy Governor for Markets and Banking said in a speech at Babraham Hall.

Having said that, the results of Bank's most recent decision maker panel "suggested" that Brexit-related uncertainty would be less of a drag on investment - one of the main drivers of productivity growth - in 2018 than during the previous year.

However, lower inward migration as a result of Brexit and demographic effects would offset some of the benefits from any improvement in the rate of growth in productivity, he said.

Low productivity growth means UK economy's speed limit is around 1.5%, so anything above that, such as current rates of GDP growth of around 1.75%, suffices to generate excess demand, undue pressures in prices and ultimately require tighter monetary policy.

Indeed, the latest set of forecasts from the BoE contained in its February Inflation Report called for productivity to growth at just over a 1% clip per year over the next 3 years, which would be around half the pre-crisis rate.

To take note of as well ahead of the February MPC meeting, rate-setters revised down their estimate of spare capacity within firms, albeit not that for the underlying rate of productivity growth, Ramsden said.

On a related note, despite all the recent 'doom and gloom' in much of the press regarding the advent of robots and artificial intelligence, he said that was offered an opportunity for Britain to boost productivity.

To make his point, he cited research from the OECD according to which the density of industrial robots in the UK was one of the lowest among industrialised countries, meaning there was scope for productivity gains.

Furthermore, half of the shortfall in productivity growth since the financial crisis was directly attributable to Finance and Manufacturing, he said.

Hence, pointing to the example of the 1700 science and technology companies clustered at Silicon Fen, in Cambridge, including a large array of science infrastructure, he sounded a positive note on the long-term outlook, arguing for greater and high quality investments in such capital.

"Investment in new technologies could indeed support a pickup in productivity."