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MNI POLICY: BOE Eyes UK Trend Growth As Labour Force Tightens

(MNI) London

A stagnating UK workforce and a likely higher equilibrium rate of unemployment have raised the chances that the Bank of England will ratchet its already-low estimate for trend economic growth still lower when it produces its annual supply-side stock take in its February Monetary Policy Report.

The BOE last assessed potential supply growth in November 2021 as around 1.5%, but the the labour force seems to have moved away from a prolonged period of growth prior to the Covid pandemic. Private sector economists have already adjusted their estimates of how quickly the economy can grow without driving inflationary pressures, with Allan Monks at JP Morgan saying the rate may have slipped below 1%.

At the same time, and uniquely among advanced economies, the labour force participation rate has also headed lower since the end of pandemic restrictions, with mooted causes including early retirement, long-term sickness, strains on the health services, an ageing population and the loss of freedom of movement for European workers post Brexit.


As MNI has already reported, the Bank’s estimate of the rate of unemployment compatible with stable prices is also likely to be revised up, from 4.25%. This would point to upward pressure on earnings growth if the wedge between current unemployment and the estimate of the non-accelerating inflation rate of joblessness widens. (see MNI INTERVIEW:UK With Higher NAIRU More Prone To Wage Pressure)

Monetary Policy Committee member Jonathan Haskel has highlighted how official survey-based data, based on single reasons for withdrawing from the labour market, appear to understate the extent of long-term sickness and how there is a fine dividing line behind taking early retirement and leaving the labour force due to ill health for some workers (See MNI Interview: Long-term Sickness Hits Jobs Market - BOE Haskel).

The government has indicated that the upcoming March Budget will try to find ways to get more over '50s workers back to work, with measures including tax breaks being floated in the media. While there are questions over the effectiveness of tax changes, the BOE never includes possible future changes in its assessment anyway, taking current fiscal policy as given.

MNI London Bureau | +44 203-586-2223 |
MNI London Bureau | +44 203-586-2223 |

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