Prospects for UK growth in the aftermath of the financial crisis

Abstract

The productivity performance of the UK economy in the period 1990-2007 was excellent. Based entirely on pre-crisis data, and using a two-sector growth model, I project the future growth rate of GDP per hour in the market sector to be 2.61% p.a. But the financial crisis and the Great Recession which began in Spring 2008 have dealt this optimistic picture a devastating blow. Both GDP and GDP per hour have fallen and are still below the level reached at the peak of the boom. So I discuss a wide range of hypotheses which seek to explain the productivity collapse, including the impact of austerity. Most of the conclusions here are negative: the explanation in question doesn't work. I next turn to the long run impact of financial crises, particularly banking crises, on productivity, capital, TFP and employment. Based on a crosscountry panel analysis of 61 countries over 1950-2010, I argue that banking crises generally have a long run impact on the level of productivity but not necessarily on its long run growth rate. I therefore predict that the UK will eventually return to the growth rate predicted prior to the crisis. This prediction is conditional on the UK continuing to follow good policies in other respects, in particular not allowing the government debt-GDP ratio to rise excessively. Nonetheless the permanent reduction in the level of GDP per worker resulting from the crisis could be substantial, about 5½%. The crosscountry evidence also suggests that there are permanent effects on employment, implying a possibly even larger hit to the level of GDP per capita of about 9%.

The Financial Crisis, Bank Lending and UK Productivity: Sectoral and Firm-Level Evidence

“…Pessoa and van Reenen (2013) calculate TFP on the basis of different assumptions about capital stock growth and find a relatively small fall in TFP after the crisis that they attribute to under-utilisation of factors in the recession and uncertainty-driven misallocation. But Oulton (2013) argue that the estimate of capital per worker used by Pessoa and van Reenen is incorrect as it is based on too high an estimate of the pre-crisis capital stock. Clearly, the lack of reliable data on capital at the sectoral and aggregate level makes it difficult to be confident in the conclusions of this analysis.…”

Prospects for the Uk Economy

“…The reasons for the weakness in productivity growth have been widely debated (e.g. Oulton, 2016;van Ark, 2019). It is therefore a considerable challenge to achieve close to this rate of growth every year.…”

The Anatomy of UK Labour Productivity: Lessons from New and Existing Data Sources

“…For policy-makers, the abundance of research on this topic is both a boon and a curse. In the UK context, which is the most pressing issue (Oulton, 2016)? Should policy focus on the slowdown of labour productivity growth, or the long-standing differences in the levels of labour productivity across countries or businesses?…”