A deputy Governor of the Bank of England has warned that Brexit is hampering the UK’s productivity growth.
In a speech in Cambridge, Sir Dave Ramsden said that the UK’s departure from the EU is imposing a “dampening affect” on the UK’s productivity, defined as the amount of output the UK workforce can produce per hour worked and the key ingredient of rising household living standards.
“The dampening effect of Brexit on productivity growth – both through the effect of uncertainty on business investment in the short run and through the need to anticipate and respond to post Brexit trading relationships – is likely to continue for some time,” he said.
UK productivity growth actually grew by 0.8 per cent in the final quarter of 2017, according to the latest estimate from the Office for National Statistics.
Combined with the 0.9 per cent expansion in the third quarter, this was the strongest six month period for productivity since the financial crisis over which time output per hour has been essentially stagnant.
Despite this recent surge, the Bank’s latest forecasts are for output per hour growth to remain subdued over the next three years, growing at well below pre-financial crisis rates.
Sir Dave, who joined the Bank as deputy Governor for markets after a long career working at the Treasury last year, said that, regardless of Brexit, “it is reasonable to argue that we are in a new paradigm of lower productivity growth, and that is reinforced by the global nature of the weakness.”
However, Sir Dave did suggest that the Brexit drag on productivity could ease if the negotiations with the EU progress smoothly this year, reducing the uncertainty for firms.
“If there is clarity around the transition and future trading arrangements post Brexit, this could continue to reduce uncertainty, support business investment and lead to a stronger than expected pickup in productivity growth,” he said.
He also highlighted that some evidence from the Bank’s Decision Maker Panel Survey suggesting that the negative impact of Brexit on business investment growth may be lower in 2018 than 2017.
Many other industrial surveys have shown that Brexit has caused firms to shelve investment plans until the outlook on future trade arrangements with the EU is clearer.
Sir Dave, along with fellow deputy governor Sir Jon Cunliffe, was one of two members of the nine-person Monetary Policy Committee at the Bank who voted against raising rates to 0.5 per cent last November, on the grounds that he was not convinced that average wage growth was yet picking up as hoped.
