MNI INTERVIEW: OBR Bean: UK Productivity Boost Likely Illusory

--Most Likely Case Is Productivity Gain Due Measurement Error: OBR Bean

--Sees Case For Transition Away From RPI Linked Gilts To CPIH: Bean 

By David Robinson

     LONDON (MNI) - The acceleration in UK productivity growth in the second

half of 2017 is likely to prove ephemeral, Charles Bean a member of the Office

for Budget Responsibility, told MNI in an exclusive interview.

     For the UK to see sustained, robust growth it needs productivity to

accelerate but Bean, a former Bank of England Deputy Governor, said that the

most likely explanation for the recent reported pick-up in productivity was

measurement error. 

     Bean said that the sudden fall in hours worked had come at a time when

employment and growth had been maintained, which was abnormal as such a steep

decline would normally come "when demand falls off a cliff."

     Data from the Office for National Statistics showed productivity growth in

the second half of last year came in 0.2 percentage points stronger than the OBR

had forecast in November but this growth was driven by a reported 1.0% fall in

average hours worked, the sharpest fall seen since mid-2011.

     "The fact that output growth and employment growth have been in line with

expectations ... is the thing that makes you think that it is the hours data

that is out of line," Bean said.

     --UPSIDE UNWIND

     If the recent decline in hours worked is the glitch in the data series then

"it was quite likely to unwind as we go through this year," pushing down on

productivity growth, Bean added.

     He said that a second, somewhat rosier, scenario was that firms had been

slow to respond to the softer growth in the first half of 2017 and had kept

employees working more hours than required and that they had only adjusted to

that in the latter half of the year. 

     But if that was true, comparing recent data with a year earlier would still

only imply productivity growth was running around 1%, in line with the OBR's

downbeat forecasts.

     The OBR, in its Economic and Fiscal Outlook published Tuesday, predicted

productivity growth would rise to just 1.25% by 2022 and average 1.0% a year

from 2018 to 2022, a full percentage point below pre-financial crisis norms.

     A third scenario, that the recent acceleration in productivity growth is

real and the start of a new trend, is a tempting one for politicians to endorse

but Bean said "it seems very peculiar that the way this productivity improvement

is being manifested is by workers being told 'OK, you need to work less'."

     --INFLATION MEASURE

     Away from productivity, Bean talked about ending the use of the

fundamentally flawed RPI inflation measure and moving to CPIH index-linked

gilts. Chancellor of the Exchequer Philip Hammond will ultimately be responsible

for the decision on indexation.

     "The problem with shifting indexation of gilts from RPI to something else

is that you potentially trigger a redemption clause on the gilts and that is

basically the reason the ONS continues to produce RPI," Bean said.

     "What you could do is say for existing debt that is indexed to RPI, the

index will be calculated on the existing basis until those gilts mature but new

gilts would be issued indexed to CPI, or CPIH," he said.

     BOE Governor Mark Carney suggested at a recent House of Lords committee

hearing that that it was time to have a transition plan for a move away from

RPI. "I can see the sense in that," Bean said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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