Bank of England chief issues chilling productivity warning despite wage growth

Interest rates: Guidance ‘had been met’ says Ramsden

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Speaking to the Telegraph on Saturday, Michael Saunders, who sits on the Bank’s Monetary Policy Committee (MPC), said: “The best way, really the only way, to achieve a sustained rise in real wages is through higher productivity growth.” Asked if there were signs of higher productivity growth at present, he answered: “So far, no.”

Mr Saunders stated: “It’s very hard in advance to anticipate the details of how productivity growth can pick up, but we know the general conditions which help.

“It’s where the economy grows steadily, business investment is strong, firms are able to plan for the long term, there’s an emphasis on skills, training, a well-educated workforce, flexible markets.

“Once you have those conditions, and firms feel confident that they will continue, you tend to see productivity growth and you’re more likely to see it in different sectors.”

He added that the labour shortages “across many sectors” was “likely to push up pay growth, and indeed already seems to be”.

He said that while his remarks were “not intended to be a criticism of government policy”, he warned that the “concern is that with a tight labour market […] you might get pay growth creeping above the rate at which is consistent with the inflation target, without the accompanying productivity growth.”

His cautious appraisal of the current UK jobs market sits in contrast with the more optimistic views of the Prime Minister and other economists. 

Writing in the Telegraph last Wednesday, Patrick Minford, professor of applied economics at Cardiff University, noted that “productivity has risen 2.6 percent in the past 18 months,” as a “tightening” of the labour market is forcing firms to use labour “more effectively” and introduce new ways of working.

The Professor of applied economics at Cardiff University said that UK companies being denied “easy access to unskilled EU workers” by new immigration rules after Brexit means “economising on unskilled workers is now as important a managerial task as […] has always been”.

The Prime Minister also lauded the rise in wages as something “that has been long overdue in the UK economy”.

Boris Johnson added: “We are not going back to the same old broken model with low wages, low growth, low skills and low productivity – all of it enabled and assisted by uncontrolled immigration.

“The answer to the present stresses and strains – which are mainly a function of growth and economic revival – is not to reach for that same old lever of uncontrolled immigration to keep wages low.

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“The answer is to control immigration, to allow people of talent to come to this country, but not to use immigration as an excuse for failure to invest in people, in skills and in the equipment the facilities the machinery they need to do their jobs.”

In the UK, a Road Haulage Association (RHA) survey of its members estimates there is now a shortage of more than 100,000 qualified drivers.

This is compounded by a shortage in natural gas supply globally, as economies begin to unlock from the pandemic.

Mr Saunders said that “although the shortages in shops is a really obvious symptom of labour shortages, the issue is much more widespread”.

He took a dim view of those currently queueing up at petrol pumps during the fuel shortage. 

“I don’t see any point in going around sort of looking at petrol stations at the moment because as far as I can tell, none of them have any and if they do, there’s a queue a mile long,” he said.

These “transitory” prices might last three to six months – but the labour shortage could last longer than that, he warned.

Mr Saunders has personally responded to the current shortages of fuel by taking up cycling.

It comes as he hinted that the Bank of England could raise interest rates before the end of this year. Investors are pricing in an increase in interest rates to 0.75 percent by the end of next year.

Markets are starting to price in a December rate hike, which despite saying he was “not in favour of […] stating our intentions in advance”, Mr Saunders described as “appropriate”.

The Consumer Prices Index including owner occupiers’ housing costs rose by three percent in the 12 months to August 2021, the Office for National Statistics announced in September, and this is expected to go higher before the end of the year.

Raising interest rates would help reign in inflation. However, it would also see an increase in bills for many UK households, pushing rates higher on mortgages and putting pressure on businesses that had taken on debt during the coronavirus pandemic.

The Bank of England – which sets the base rate for lending in the UK – slashed their interest rate to 0.1 percent in March last year as part of measures to tackle the economic instability caused by the pandemic.

Mr Saunders said: “You can be aggressive in providing stimulus when it’s needed. But the flip side of that is to be willing to take away some of that stimulus when inflation risks are no longer to the downside but more to the upside.”

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