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Free AccessMNI BRIEF: China Crude Oil Imports Accelerate In November
MNI BRIEF: RBA Holds, Notes Declining Inflation Risk
UK OBR: Set To Cut Next 5 Yrs Productivity Growth Estimates
--Cut To Productivity Growth Likely Largest Impact On Public Finances
By David Robinson
LONDON (MNI) - The Office for Budget Responsibility expects to
substantially cut its estimate of UK productivity growth, and says that this
will likely have the biggest impact on its public finance projections that will
underpin the November Budget.
The OBR, in its Forecast Evaluation Report (FER), made clear that it is
likely to paint a gloomier picture of the outlook for the public finances when
the Budget is published on November 22. UK productivity growth has persistently
come in below expectations and the OBR is now set to lower its projections.
On the upside for the public finances, the OBR noted that the equilibrium
jobless rate appears to have fallen and average hours worked have increased, but
these are unlikely to offset the impact from anaemic productivity growth.
"A downward revision to prospective productivity growth would weaken the
medium-term outlook for the public finances, while a lower sustainable rate of
unemployment and more hours worked would strengthen it .. the downward revision
to productivity growth is likely to have the largest quantitative impact," the
FER stated.
The OBR noted that weakness in UK productivity growth has lasted for almost
a decade, with the ground lost at the outset of the global financial crisis
never being recovered.
The OBR at one time assumed productivity would rebound once the banking
system was repaired, but despite banks becoming much better capitalised this has
not happened. Another assumption, that firms hoarded labour during the financial
crisis, has become less relevant as time has passed.
The OBR said a more relevant explanation for current productivity weakness
is that business investment growth has been very weak and is currently estimated
at just 5 per cent above its pre-crisis peak. The UK electorate's decision to
leave the European Union also does not appear to be helping.
"The renewed weakness of productivity so far in 2017 may in part be a
temporary effect of the Brexit vote and the uncertainty that it has generated.
But given the bigger picture - both over time and across countries - it is clear
that we will need to revisit our trend productivity growth assumptions again in
November," the OBR said.
A recent report in the Financial Times citing Treasury officials said that
they believed the OBR's anticipated cuts to productivity growth could wipe out
two-thirds of the cushion relative to its fiscal goal of getting the target
deficit below 2% of GDP by fiscal year 2020-21.
The OBR in its March 2017 forecasts assumed trend productivity growth would
rise gently to 1.8% in 2021, compared to 2.1% pre-financial crisis, but instead
it has average a paltry 0.2% over the past five years.
"We continue to believe that there will be some recovery from the very weak
productivity performance of recent years, the continued disappointing outturns,
together with the likelihood that heightened uncertainty will continue to weigh
on investment, means that we anticipate significantly reducing our assumption
for potential productivity growth over the next five years in our forthcoming
November 2017 EFO (Economic and Fiscal Outlook)," the OBR said.
It did not specify precisely how low its new estimate of productivity
growth is likely to be.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MFB$$$,MGB$$$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.