MNI INTERVIEW: Ex-BOE's Fisher Expects UK Trend Growth To Slow

Low UK productivity growth largely reflects the relative decline of manufacturing and hopes of a rebound look likely to be dashed, economics professor Paul Fisher, a former executive director for markets and Monetary Policy Committee member at the Bank of England, told MNI.

In work for the UK Productivity Commission, Fisher found that the steep decline in the number of people employed in the manufacturing sector, which has a history of sustained productivity growth, and the shift to services has been the long-term driver of productivity weakness.

"In terms of the way it's measured, I think it's almost everything. If we go back to 1970, 30% of the UK economy was manufacturing. Now it's less than 10%. Manufacturing employment has also fallen by a third,” Fisher said. “Developed countries have had a decline in their manufacturing share and are seeing corresponding declines in their productivity growth …No country can keep growing at a fixed exponential rate forever.”

UNFAVOURABLE TRENDS

The opposition Labour Party, handsomely leading in polls ahead of elections which must be held by no later than next January, has made boosting growth a plank of policy, but long-term trends are not favourable.

"The most likely thing is that trend growth will continue to slow. It doesn't have to be zero or negative. You'd expect it to get very slightly slower each year," Fisher said.

Two hopes for stronger productivity growth are in digital services driven by the adoption of artificial intelligence and the shift to green technology. But if relatively small numbers of people were to work with AI and others shift to less AI-intensive sectors the aggregate productivity boost may not materialise. (See MNI INTERVIEW: US Productivity Boom Can Mask Price Pressures)

"It's difficult to imagine at the moment how lots of people could be employed in doing artificial intelligence work,” Fisher said, though he noted, “Back in the day, people couldn't see how automation of manufacturing would actually generate an increase in jobs but it did for a very long time.” (See MNI INTERVIEW: UK Productivity Suffering Long-Term Scarring)

FISCAL RULES

Productivity forecasts are a key element of uncertainty within economic forecasts used to judge of whether the government is complying with its fiscal rules, with the Office for Budget Responsibility, an official watchdog, relatively optimistic in expecting an improvement in output per unit of input. But these fiscal rules should be ditched in Fisher's view. (See MNI INTERVIEW: UK Budget's Imaginary Cuts A "Fiscal Fiction")

"I think we should be having discussions which are longer-term focussed ...We have this budget once a year ... which is pretty much focussed on making the numbers add up over the next year and ex-post they don't. We never actually get the numbers that are set out a year earlier. So why do we keep tying ourselves into short-term forecasts?" he said.

"Politicians should have a genuine debate about how big the share of government in the economy should be ... What level of taxes do we have to put in place in order to meet that level of expenditure and to facilitate what should be a natural decline in the debt and deficit ratios over time in peacetime (and absent crisis.).”

Making fiscal policy by deploying the BOE’s "constrained discretion" approach would be a step forward, he said.

"The rules need to be longer term. They need to be rolling ... it's constrained discretion. ... You want discretion to reflect circumstances ... and you want some constraints to give certainty. That's how the MPC works." (See MNI INTERVIEW: Fiscal Ratchet Puts UK Debt On Untenable Path)