In 2017’s Autumn Budget, Chancellor Philip Hammond slashed the UK’s productivity growth forecast, as earlier optimistic predictions proved unfounded. There is now concern that far from being a recovery phase following the financial crisis, we may be in a period of permanently low productivity growth.
In his Budget speech the Chancellor said: “Regrettably our productivity performance continues to disappoint. The Office for Budget Responsibility (OBR) has assumed at each of the last 16 fiscal events that productivity growth would return to its pre-crisis trend of about 2% a year, but it has remained stubbornly flat.”
In light of this disappointing performance, the OBR revised down its forecast for GDP growth, which it believes will reach 1.5% in 2017, 1.4% in 2018, and 1.3% in 2019 and 2020, before picking back up to 1.5% and finally 1.6% in 2022.
In an earlier report published before the Budget, the OBR had said: “It is notable that the ‘productivity puzzle’ is not just a UK phenomenon. For instance, the US Congressional Budget Office has made similar downward revisions to its productivity forecasts, as have the IMF and the OECD in their forecasts for many advanced economies. And weak investment and the impact of very low interest rates are plausible explanations for many countries.
“But it is also worth noting that some commentators have argued that the advanced economies have entered an era of permanently subdued productivity growth for structural reasons.”
Suffering from low productivity is not a unique phenomenon to the UK. Weak investment and low interest rates in economies across the world mean that productivity is a puzzle that needs global attention.