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BoE confounded by low UK productivity


The Bank of England has admitted that it cannot explain the "puzzle" of weak levels of U.K. productivity -- an important measure in determining when interest rates could start rising – while other indicators such as employment and economic output seem to be doing so well.

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Productivity remains around 4 percent below pre-crisis levels, the Bank of England said, and 16 percent below levels it should be at had the pre-crisis trend continued.

Defined as the quantity of goods and services produced per worker or per hour, labor productivity is a key measure to determine the health of an economy.

The BoE paper, published in the central bank's quarterly bulletin of economic research said since the onset of the 2007–08 financial crisis, labor productivity in the U.K. had been "exceptionally weak".

"The fall in labor productivity during the recent recession has been larger than in any other post-war recession," the paper found.

Nonetheless there are other indicators that the U.K economy was improving. The National Institute of Economic and Social Research forecast last week that the U.K. economy grew by 0.9 percent in the three months ending in May after growth of 1.1 percent in the three months ending in April 2014. That suggests U.K. GDP has surpassed the level pre-recession peak.

A growing number of brokerages is bringing forward its expectations for a rate hike by the Bank of England after governor Mark Carney suggested last week rates could rise sooner than expected. Credit Suisse on Monday said it now expects the bank to start tightening monetary policy in November, from a previous forecast of February 2015.

U.K.unemployment continued to fall in the three months to April, hitting its lowest level since 2009, as hiring boomed. Pay grew less than forecast over the three months, however.

However, it was still unclear however why productivity was so low.The bank put forward several hypotheses, but conceded there remained "considerable uncertainty around any interpretation of the puzzle".

The weakness could be driven by weak demand conditions. Firms may be unable or unwilling to lay off workers, either because of minimum staffing levels required to keep the business going, or because they believe the weakness in demand to be temporary, the bank said.

Another hypothesis suggests underinvestment or in efficient allocation of resources may have disrupted the capacity of the economy to supply goods and services.

Businesses may also have shifted staff from operations that would typically generate revenue to business development activities when faced with weak demand, the bank said.

The BoE said the weakness of labor productivity and the recent strength in employment growth suggest that temporary or cyclical factors alone were unlikely to fully explain the "productivity puzzle".

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