Implications The 2018 Peston Lecture Silvana Tenreyro Monetary - PowerPoint PPT Presentation

The Fall in Productivity Growth: Causes and Implications The 2018 Peston Lecture Silvana Tenreyro Monetary Policy Committee, Bank of England 15 January 2018

Preview of main points • Finance and manufacturing account for most of the fall in UK productivity growth. • Post-crisis drag from finance should disappear as deleveraging ends. • Slower manufacturing productivity growth may relate to a reduced impact of cheap imported inputs from emerging markets. • Weak investment has been increasingly important for manufacturing and aggregate productivity. 2018 Peston Lecture, Queen Mary, University of London 3

Productivity growth has fallen 5 Percentage change on a year earlier 4 3 2 1 0 -1 Crisis -2 -3 Productivity (GDP per hour worked) -4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Peston Lecture, Queen Mary, University of London 4

Productivity fell below trend Log scale, 1977=100 Productivity (GDP per hour worked) 240 220 1977-2007 trend 200 2009-16 trend 180 160 140 120 100 99.9999 1977 1982 1987 1992 1997 2002 2007 2012 2018 Peston Lecture, Queen Mary, University of London 5

Historical productivity growth Annual growth, 10 5 year moving average 4 3 2 1 0 -1 -2 1770 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 2018 Peston Lecture, Queen Mary, University of London 6

International productivity comparisons Constant price GDP per hour worked, Current price GDP per hour worked, 2016 average annual growth rates, 2007-16 Percentage difference from UK Per cent 40 G7 average (excluding UK) 1.2 30 1.0 20 0.8 0.6 10 0.4 0 0.2 -10 0.0 -20 -0.2 2018 Peston Lecture, Queen Mary, University of London 7

Why we care about productivity It matters for welfare: consumption, leisure Weekly hours not in Log scale, Productivity (GDP per hour worked, RHS) work (out of 84) Index 1831=100 80 3200 Real GDP per person (RHS) Consumption per person (RHS) 60 Leisure (LHS) 800 40 200 20 0 50 1831 1851 1871 1891 1911 1931 1951 1971 1991 2011 2018 Peston Lecture, Queen Mary, University of London 8

Why we care about productivity It matters for welfare: real wages Log scale, Index 1762=100 3200 Productivity (GDP per hour worked) 1600 Real wages 800 400 200 100 50 1762 1787 1812 1837 1862 1887 1912 1937 1962 1987 2012 2018 Peston Lecture, Queen Mary, University of London 9

Why we care about productivity: It matters for monetary policy Productivity Output gap Baseline Per cent Index: Quarter 0=100 0.5 High productivity (no policy response) 125 High productivity (optimal policy) 120 0.3 Low productivity (no policy response) 115 Low productivity (optimal policy) 0.1 110 105 0 4 8 12 16 20 24 28 32 36 -0.1 100 -0.3 95 0 4 8 12 16 20 24 28 32 36 Quarter Quarter -0.5 Annual inflation Bank Rate Percentage Percentage change points on a year earlier 0.5 2.4 0.3 2.2 0.1 2 -0.1 0 4 8 12 16 20 24 28 32 36 1.8 -0.3 1.6 0 4 8 12 16 20 24 28 32 36 Quarter -0.5 Quarter 2018 Peston Lecture, Queen Mary, University of London 10

Full growth accounting decomposition Post-crisis (2009-15) average, pp of which, change in labour quality Share of Sector in nominal GVA, Pre-crisis (2000-07) average, pp Crisis (2007-09) average, pp Change in contribution, pp deepening contribution, pp of which, change in capital Actual change in quantity Actual change in revenue of which, change in TFP productivity growth, pp productivity growth, pp reallocation/other, pp contribution, pp contribution, pp of which labour (% of total) 2007, % Sector A: Agriculture, forestry and fishing 0.0 -0.1 0.1 0.0 (-2) 0.0 0.0 0.0 0.0 1 3.2 6.2 B: Mining and quarrying -0.1 -0.2 -0.1 0.0 (1) -0.2 0.0 0.0 0.2 3 -6.2 -13.5 C: Manufacturing 0.5 -0.1 0.1 -0.5 (31) -0.1 0.0 -0.3 0.0 12 -3.5 1.3 D: Electricity, gas, steam and air conditioning 0.0 0.0 0.0 -0.1 (4) 0.0 0.0 -0.1 0.0 1 -4.9 -0.8 E: Water supply, sewerage and waste 0.0 0.0 0.0 0.0 (1) 0.0 0.0 0.0 0.0 1 -2.1 -6.1 F: Construction 0.0 -0.3 0.2 0.1 (-10) -0.1 0.0 0.2 0.0 8 1.8 0.6 G: Wholesale and retail trade; repair of vehicles 0.4 -0.4 0.3 -0.2 (12) -0.1 0.0 -0.1 0.0 13 -1.1 -1.0 H: Transportation and storage 0.1 -0.3 0.1 0.0 (3) 0.0 0.0 0.0 0.0 5 -0.7 2.6 I: Accomodation and food service 0.0 0.0 0.0 0.0 (3) 0.0 0.0 0.0 0.0 3 -1.3 2.1 J: Information and communication (ICT) 0.3 0.1 0.1 -0.2 (13) -0.1 0.0 -0.1 0.0 7 -3.0 -1.0 K: Financial and insurance 0.4 0.2 -0.3 -0.6 (43) -0.1 0.0 -0.5 -0.1 9 -7.1 -11.7 L: Real estate (excluded) M: Professional, scientific and technical 0.3 -0.1 0.1 -0.2 (14) -0.1 0.0 -0.1 0.0 8 -2.7 -1.2 N: Administrative and support service 0.0 -0.1 0.2 0.1 (-8) -0.1 0.0 0.2 0.0 5 2.4 0.0 O: Public administration and defence 0.0 0.1 0.0 0.0 (0) 0.0 0.0 0.0 0.0 6 0.3 0.6 P: Education -0.1 -0.2 -0.1 0.0 (-2) 0.0 0.0 0.0 0.0 7 0.7 -3.3 Q: Human health and social work 0.1 -0.1 0.0 0.0 (1) 0.0 0.0 0.0 0.0 8 -0.4 -3.1 R: Arts, entertainment and recreation 0.0 0.0 0.0 0.0 (1) -0.1 0.0 0.0 0.0 2 -1.0 -0.1 S: Other service activities 0.0 0.0 0.0 0.0 (-3) 0.0 0.0 0.1 0.0 2 1.7 0.1 Total 2.0 -1.6 0.4 -1.5 (100) -1.0 0.1 -0.8 0.2 100 Manufacturing, finance, prof. and ICT only 1.5 0.0 -0.1 -1.5 (103) -0.4 0.0 -1.1 -0.1 36 Other sectors 0.5 -1.7 0.5 0.0 (-3) -0.6 0.1 0.2 0.3 64 2018 Peston Lecture, Queen Mary, University of London 11

Sectoral decomposition of productivity growth Slowdown: difference between pre and post crisis periods ICT Percentage points Prof. & scientific 2 Finance Manufacturing 1 Other Total 0 -1 -2 1995-2000 2000-07 2007-09 2009-15 Difference (09-15 minus 00-07) 2018 Peston Lecture, Queen Mary, University of London 12

Decomposition of manufacturing productivity growth Slowdown: difference between pre and post crisis periods TFP Percentage points 5 Labour quality Capital services 4 Total 3 2 1 0 -1 -2 -3 -4 2000-07 2007-09 2009-15 Difference (09-15 minus 00-07) 2018 Peston Lecture, Queen Mary, University of London 13

Measurement of value added • Statistical offices aim at capturing: 𝑛 𝑟 𝑢 − 𝑞 × 𝑛 𝑢 0 In practice, they deflate nominal value added, • 𝑧 𝑛 𝑞 × 𝑟 𝑢 − 𝑞 × 𝑛 𝑢 , 𝑢 𝑢 And obtain: 1 1 𝑧 𝑧 𝑛 𝑛 1 𝑧 ( 𝑞 × 𝑟 𝑢 − 𝑞 × 𝑛 𝑢 𝑧 𝑞 × 𝑟 𝑢 − 𝑛 𝑞 × 𝑛 𝑢 SD: ) DD: 𝑢 𝑢 𝑢 𝑢 π π π 𝑢→0 𝑢→0 𝑢→0 2018 Peston Lecture, Queen Mary, University of London 14

Decomposition of finance productivity growth Slowdown: difference between pre and post crisis periods Percentage points 6 4 2 0 -2 TFP Labour quality -4 Capital services -6 Total -8 2000-07 2007-09 2009-15 Difference (09-15 minus 00-07) 2018 Peston Lecture, Queen Mary, University of London 15

Slowdown: factor decomposition Factor Pre-crisis Crisis Post-crisis Post-crisis (% of total) (2000-07) (2007-09) (2009-15) difference TFP 0.6% -3.3% -0.2% -0.8% (54%) Capital services 1.1% 1.0% 0.1% -1.0% (66%) Labour services 0.4% 0.6% 0.5% 0.1% (-7%) Labour reallocation -0.2% 0.0% 0.0% 0.2% (-13%) Other 0.1% 0.1% 0.1% 0.0% (0%) Total 2.0% -1.6% 0.4% -1.5% 2018 Peston Lecture, Queen Mary, University of London 16

Slowdown: international comparison 7 Percentage points TFP 6 Capital 5 Labour productivity 4 3 2 1 0 -1 -2 -3 00- 07- 09- 00- 07- 09- 00- 07- 09- 00- 07- 09- 00- 07- 09- 07 09 16 07 09 16 07 09 16 07 09 16 07 09 16 World EMEs EA US UK 2018 Peston Lecture, Queen Mary, University of London 17

Take away • Manufacturing and finance account for most of the UK productivity slowdown. • The Finance boom and bust can be traced to the pre-crisis growth in leverage and the subsequent deleveraging post-crisis. – As deleveraging runs its course, finance should stop detracting from average productivity. • Pre-crisis productivity growth in manufacturing may be related to offshoring and rapidly falling prices of imported inputs. – Going forward, global growth momentum should give a boost to UK manufacturing. • In aggregate weak investment has been the main drag on labour productivity growth. – As uncertainty is removed, investment could help recover lost ground. 2018 Peston Lecture, Queen Mary, University of London 18