Pace of UK Growth Under Threat

Britain's economy is unlikely to grow as fast as before the financial crisis because its most productive sectors have been hardest hit, jeopardising government plans to cut the deficit.


A Financial Times analysis of the sectorial performance of the economy before and after the crash highlights how much banks and insurance companies boosted economic growth between 2000 and 2008.

The output of financial services - chiefly measured by the size of banks' balance sheets - grew by 53 percent between 2000 and 2008, contributing an average 0.4 percentage points to growth a year.

But since the recession started, the financial sector - counted as highly productive in statistical terms - has shrunk by 9 percent.

That contraction is twice the 4.7 percent decline in the economy as a whole to the end of 2010, as banks have sought to offload loans and reduce balance sheets.

As big banks continue to deleverage, the process is likely to constrain the UK economy's growth rate for some years.

Philip Rush, economist at Nomura, said the breakdown of official figures suggested a lot of the weakness since 2008 was due to disproportionate shrinkage of the financial sector.

Given that this trend was unlikely to reverse, "the recovery is likely to remain muted".

The view that the growth rate of the economy might be persistently weaker than widely thought is shared by some senior former policymakers.

Last week, Sir John Gieve, former deputy governor of the Bank of England, said: "It may well be the case that we face a 1 percent to 1.5 percent sustainable growth rate." His estimate is significantly lower than the Bank and Office for Budget Responsibility assumptions, which are closer to 2.5 percent.

One striking puzzle in the UK economy since 2008 is that the loss of jobs has been much smaller than the decline in output, leading many economists to believe companies were waiting for the right moment to switch production back on.

The FT's research, however, suggests such views may be a misreading of the data.

Most of the puzzle can be explained by job reductions in the sectors with the highest levels of output per job - financial services and the oil industry - leaving less scope elsewhere for output to rise without companies hitting capacity constraints.

Michael Saunders, a Citi economist, said the Bank, which publishes its quarterly inflation report on Wednesday, might have to accept there was less spare capacity than it thought in the economy.

The implication is that without rapid growth in financial services, productivity growth - the output per job - will be lower and the economy will not be able to grow as fast as it did over the past decade without generating inflation.

"The pace of productivity growth is one the UK only achieved in the pre-bust period and a sizeable part of that was either a statistical artefact or a temporary surge," Mr Saunders said.