UK Economic Performance since 1997: Growth and Productivity

Transcription

1 UK Economic Performance since 1997: Growth and Productivity Anna Valero: Centre for Economic Performance, LSE John Van Reenen: Centre for Economic Performance & LSE CEP/CAGE/IFS Special Session on Growth Royal Economic Society, March 26 th 2012

2 Introduction Getting back to growth the major challenge: Deficit reduction debate. Speed & scale of fiscal austerity How to improve productivity growth in medium run? What happened post 1997 (vs & other countries)

3 RECOVERY FROM THIS RECESSION IS VERY SLOW UK GDP STILL ~4% BELOW 2008 LEVELS IN s 1980s 1930s Current Source: NIESR 3

4 Summary Given current gloom, UK did surprisingly well post 1997 even after including current recession Fastest GDP per capita growth of G6 nations Not bubble in finance (or public sector, property or oil) More than continuation of improvement after Mrs. Thatcher - Policies likely played a part Since pre-2007 productivity improvements real, output gap may be larger than supply side pessimists think Implies room for Plan B, slowing fiscal consolidation Long-run growth strategy Get economic environment right Relentless focus on removing barriers in sectors with strong global growth & where UK has comparative advantage 4

5 1 UK Relative Economic Performance since 1997: Growth, productivity and jobs 2 Role of Policy? 3 The Great Recession and Beyond 4 Policies for Growth 5

6 UK growth in GDP per capita faster than every other G6 country Annual average growth GDP per capita, UK Germany US France Japan Italy GDP per capita (person) Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). 6

7 UK growth in GDP per capita faster than every other G6 country Annual average growth GDP per capita & GDP per adult, UK Germany US France Japan Italy GDP per capita (person) GDP per capita (adult) Focus for next few slides Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

8 Real GDP per capita relative to UK GDP per capita growth performance was strong in both the pre and post 1997 periods Trends in GDP per capita relative to UK Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

9 Real GDP per capita relative to UK GDP per capita growth performance was strong in both the pre and post 1997 periods Trends in GDP per capita relative to UK US Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

10 Real GDP per capita relative to UK GDP per capita growth performance was strong in both the pre and post 1997 periods Trends in GDP per capita relative to UK US Germany France Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

11 Growth decomposition 1 Basic welfare measure GDP GDP Employees x Capita employee population Labour productivity Employment Rate 11

12 Real GDP per worker relative to Growth decomposition 1: workers Labour Productivity - GDP per worker relative to UK US Germany France Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

13 Employment per capita relative to Growth decomposition 1: workers Employment Rate - Employment per capita relative to UK US Germany France Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

14 Real GDP per hour relative to Growth decomposition 2: hours GDP per hour relative to UK US Germany France Notes: OECD data GDP is US$, constant prices, constant PPPs, (OECD based year: 2005). Adults are civilian population over 16. US Bureau of Labour Force Statistics. Data for Unified Germany from

15 Annual average growth rates in percentage points The sources of productivity growth by sector : It wasn t all finance in the boom Sector contributions to market economy labour productivity growth ( ) % p.a. 2.8 % p.a. Financial intermediation Business services and renting of m&eq Distribution services Personal and social services Other goods producing industries Manufacturing excluding electrical Electrical machinery, post and communication Reallocation -0.5 UK Notes: Analysis based on EU KLEMS data. Average sectoral growth rates for the periods and are weighted by each sector s average share in market economy nominal GVA (GDP less taxes, plus subsidies) over the relevant period. Reallocation effect refers to the labour productivity effects of reallocations of labour between sectors that have different productivity. 15

16 Annual average growth rates in percentage points The sources of productivity growth by sector : It wasn t all finance in the boom! Sector contributions to market economy productivity growth ( ) Finance chopped off Business services and renting of m&eq UK Distribution services Personal and social services Other goods producing industries Manufacturing excluding electrical Electrical machinery, post and communication Reallocation Notes: Analysis based on EU KLEMS data. Average sectoral growth rates for the periods and are weighted by each sector s average share in market economy nominal GVA (GDP less taxes, plus subsidies) over the relevant period. Reallocation effect refers to the labour productivity effects of reallocations of labour between sectors that have different productivity. 16

17 Annual average growth rates in percentage points The sources of productivity growth by sector : It wasn t all finance in the boom! Sector contributions to market economy productivity growth ( ) Financial intermediation Business services and renting of m&eq Distribution services Personal and social services Other goods producing industries Manufacturing excluding electrical Electrical machinery, post and communication -0.5 Reallocation UK EU US France Notes: Analysis based on EU KLEMS data. Average sectoral growth rates for the periods and are weighted by each sector s average share in market economy nominal GVA (GDP less taxes, plus subsidies) over the relevant period. Reallocation effect refers to the labour productivity effects of reallocations of labour between sectors that have different productivity. EU represents all EU-15 countries for which growth accounting could be performed, i.e. AUT, BEL, DNK, ESP, FIN, FRA, GER, ITA, NLD & UK. Data for France and EU are available from 1981 onwards. 17

18 Sources of productivity growth: Skills and ICT became more important post 1997 Sources of market economy productivity growth ( ) % 2.8 % UK EU US France Efficiency (TFP) Non ICT capital per hour ICT capital per hour Labour composition Notes: Analysis based on EU KLEMS data. EU represents all EU-15 countries for which growth accounting could be performed, i.e. AUT, BEL, DNK, ESP, FIN, FRA, GER, ITA, NLD & UK. Data for France and EU are available from 1981 onwards. 18

19 UK still lags behind in total economy productivity levels GDP per hour levels (UK=100) 160% 140% 120% 127% 113% 115% 100% 80% 60% 40% 20% 0% US Germany France UK=100 in each year Notes: Analysis based on OECD data GDP is US$, constant prices, constant PPPs, Figures for 1979 West Germany only. 19

20 1 UK Relative Economic Performance since 1997: Growth, productivity and jobs 2 Was the UK s strong post 1997 Performance anything to do with Policy? 3 The Great Recession and Beyond 4 Policies for Growth 20

21 UK performance looks good... But was any of this was due to Labour policies? Government reaped dividends of Conservative reforms: privatisation, anti-union laws, lame duck subsidies, & so can only claim credit for not messing things up But Conservatives reforms were unlikely to cause permanent increase in the rate of productivity growth (e.g. unions). Likely that some Labour policies contributed: Competition, Education, Innovation & (maybe) immigration Welfare to work reforms Caveat: Lack of proper evaluation of most UK policies means much guesswork 21

22 1 UK Relative Economic Performance since 1997: Growth, productivity and jobs 2 Was the UK s strong post 1997 Performance anything to do with Policy? 3 The Great Recession and Beyond 4 Policies for Growth 22

23 Did the Great Recession change everything? 23

24 The Output Gap Debate GDP at market prices ( million), 1979Q1 to 2011Q4 15% 14% Notes: ONS Q Quarterly National Accounts, GDP in million, in real terms at market prices (seasonally adjusted) 24

25 Did the Great Recession change everything? What are the effects of Great Recession on potential output How much output permanently lost? Some, but exaggerated Lower productivity growth? Very unlikely (1930s policies) productivity gains not an illusory bubble But clear financial regulation failure over Too Big to Fail issue Supply Side Pessimists argument: banking crisis But compositional shift out of high value added sectors like finance not large enough to account for productivity falls Alternative: Low Demand (recession, Eurozone, austerity) Productivity falls widespread across industries Labour hoarding Labour market performing relatively well in this recession Risk of extreme austerity being self fulfilling prophecy 25

26 1 UK Relative Economic Performance since 1997: Growth, productivity and jobs 2 Was the UK s strong post 1997 Performance anything to do with Policy? 3 The Great Recession and Beyond 4 Policies for Growth 26

27 LSE Growth Commission No single magic bullet experiment, evaluate & learn. Getting the conditions right for sustainable growth Human capital, competition, Innovation, taxation Growth strategies: a Plan V Policies should be focused on the intersection between the areas of global growth and UK comparative advantage. Areas like: bio-pharmaceuticals, business services, creative industries and some areas of ICT Look at barriers and useful pro-active policies Example of Higher Education & Immigration 27

28 Conclusions and discussion UK growth record since 1997 pretty good & broadly continued trend from 1979 Not solely unbalanced bubble from finance, property & government Some benefit from policies over competition, education & innovation In presence of significant output gap room for slowing fiscal consolidation Long term policies need coordinated strategy drawing on lessons from past 28

29 References LSE Growth Commission Full version of the Report 11_2011/CEP_Report_UK_Business_ pdf 29