BOE minutes point to expectation of productivity increase

The minutes of the Bank of England's Monetary Policy Committee (BOE MPC) reveal an expectation of an increase in productivity, economists said Wednesday. Productivity figures in the British economy have disappointed since the financial crisis and have continued to puzzle economists during 2013 when a robust recovery failed to see a pick-up in productivity. A variety of reasons have been suggested for the poor performance, and it seems certain that it is related in part at least to the retention of jobs despite one of the worst recessions of the past 80 years, with many firms holding on to workers despite falling orders or moving workers into part-time work. Job creation has been robust since the BOE targeted 7 percent unemployment as the threshold for reviewing a Bank Rate rise. Unemployment was 7.8 percent when this target was set at the beginning of August last year. However, Wednesday's data showed that it clicked up 0.1 percent to 7.2 percent after falling sharply over the autumn and winter of 2013. The BOE revealed in its minutes of the most recent MPC meeting, at the beginning of this month, that it expected the 0.7 percent Q4 2013 growth recorded in the first take on the figures to undergo a revision upwards to 0.9 percent, making the recovery stronger. With the end to the robust fall in unemployment, this could imply productivity gains. Sam Hill, senior British economist at RBC Capital Markets, said the BOE was "optimistic about output growth prospects" but also expected a pick-up in productivity such that a good deal of the growth would not result in spare capacity being used up. David Tinsley, chief British economist with BNP Paribas, told Xinhua Wednesday afternoon, "The labor market figures for Q4 2013 were a little bit on the softer side, and if the BOE is right it would give room for something around 0.5 percent or so growth in productivity." "This would not be too bad, in terms of what the BOE has looked for in the past. It might start to look more promising in the future. "The current phase of the upswing in the economy has got momentum behind it, but it is not sustainable unless you see an improvement in productivity and a pick-up in real wage growth which would allow the consumption growth we are seeing to have a firmer basis," Tinsley said. It suggested that the recovery could be heading into a more self-sustained phase. In the short term, however, the MPC "was less confident there would be a short-term rise in productivity, but continued to think that it would move higher over time," explained Tinsley. The key detail of the MPC minutes, Tinsley noted, was the lack of disagreement among MPC members, especially as the meeting pre-dated the decision to broaden the Forward Guidance policy revealed at the quarterly Inflation Review last week. The MPC's Inflation expectations were that it would remain at the target of 2 percent, and the Tuesday CPI figure of 1.9 percent might look like downside news. Tinsley added that "In practise the Committee noted there would be month to month volatility. The Committee's view was that more of the recent decline in inflation could be accounted for by idiosyncratic factors, rather than anything saying something fundamental and aggregate demand and supply." The MPC clearly felt that there was momentum in the recovery, with reduced uncertainty, easier credit conditions and stimulative monetary policy "all likely to support the recovery", said Tinsley.