Hamish McRae: In Europe and the UK, it's a game of 'wait and see'

Economic View: As far as jobs are concerned, this is less serious than the 1980s or 1990s, and now is less serious than the 1970s

It is monthly decision day today for the Bank of England and the European Central Bank (ECB). While few expect any change in interest rates from either this month, people are now looking forward to November to ponder what the central banks might do next.

But something else has happened. The monetary policies of the central banks no longer seem to matter much.

Here in Britain, the Bank may or may not do another bout of quantitative easing in November, when the present scheme runs out. In Europe, the ECB may implement its bond-buying programme, buying the sovereign debt of the weaker countries, as recently announced. But in both cases the game is "wait and see".

We have to wait and see if the Bank of England's Funding for Lending scheme works: even if the funds are available, do companies and individuals really want to borrow? The latest data shows that mortgage-holders are repaying debt as fast as ever, which makes practical sense given the very low deposit rates. Why borrow at 4 per cent or more when your bank will only offer 1 per cent on a deposit? Far better to use any spare cash to pay off the mortgage.

In Europe, the ECB is also on hold, but for a different reason. It has staked out its intentions, and now has to wait and see what the weaker members do next. In practice, everything is on hold until Spain applies for a formal national bailout. Expect that later this month.

If monetary policy, both in Europe and here, has become pretty ineffective, and fiscal policy is being tightened everywhere, we are back to self-healing – the natural ability of economies, if left to themselves, to manage to grow. Can they do it, or has the great growth machine that has one way or another governed the world economy since the Industrial Revolution ground to a halt?

There are many strands to this debate, but it is a question which we will hear a lot more. It is not new. I remember in the strike-ridden late 1970s a celebrated political columnist pondering whether Britain was facing not just relative decline but absolute decline. That now seems absurdly pessimistic. Nevertheless, after four years of stagnant or falling living standards, it is a legitimate question.

The difficulty is separating the structural from the cyclical. We know we have experienced a serious cyclical downturn, but we don't know how much damage has been done to the nation's long-term productive capacity. Indeed, we don't even know how serious the cycle was, for the data is quite inconsistent.

You can see that from the two graphs: On the top is what has been happening to published GDP this cycle compared with the recessions of the 1970s, 1980s and 1990s. As you can see, during this cycle, the red line is far worse than the other three. But below is what has been happening to employment.

As far as jobs are concerned, this has been much less serious than the 1980s or the 1990s, and now is less serious than the 1970s. The recovery in UK employment has also been much better than in the US or eurozone.

Some people have concluded that there has been a plunge in productivity, and that is what the figures would seem to show (productivity is calculated as a residual: you take output and you take employment and that gives you output per person). If so, it would certainly be bad news for long-term growth. But part of the explanation is almost certainly that GDP is being underestimated, as has been noted here before. Goldman Sachs reckons GDP is as much as 4 per cent higher than the official figures show, and ING Bank also believes GDP is seriously understated. Both have just put out papers on this.

The trouble is that even allowing for this understatement of GDP we still have a productivity problem.

If you accept that both output, like employment, is actually back to its previous peak, the harsh truth remains that there have been no gains in productivity in four years.

How might we explain that? There are three possible answers.

One is that the key problem is lack of demand. Once that picks up (and it looks as though real incomes will start to rise next year), companies will be able swiftly to increase output to meet that demand without having to take on more people to do so.

The second is that productive capacity has been damaged by the recession but this will recover as demand recovers.

The third is that productive capacity has been permanently damaged and much of the growth has been lost forever.

If the answer is some combination of the first two, then we can relax a bit. As demand recovers, supply will recover too. So we will be able to grow swiftly for several years without any labour constraints. Employment will rise but output will rise faster.

If, on the other hand, there has been permanent damage, then the longer-term outlook for productivity (and hence higher living standards) is bleak.

Goldman Sachs inclines toward the more optimistic assessment, and that would be consistent with the fact that many of the people now in part-time jobs say they would like to work full time. If part-timers work full time, their output (though not their output per hour) goes up.

There is, however, a long-term, structural concern. It is that while we will recover from this downturn in decent enough shape, it is proving harder to increase productivity in our predominantly service economies than it was in manufacturing-driven ones. Put crudely, you can increase productivity more easily in a factory than in an old folks' home.

This is a challenge for all so-called advanced economies, such as our own, and I don't see any easy way of responding to it.

Information technology has helped increase productivity in some service industries – think of the way we book a hotel or an airline seat online – but in some core services it is hard to see how this can be achieved.

So meanwhile, maybe our best hope is that the cyclical problem will resolve itself, and support a recovery in living standards, while we figure out how to crack the structural one.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Life and Style
food + drink
News
i100
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Could cannabis oil reverse the effects of cancer?

Could cannabis oil reverse effects of cancer?

As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

The Interview movie review

You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
Serial mania has propelled podcasts into the cultural mainstream

How podcasts became mainstream

People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
Jesus Christ has become an unlikely pin-up for hipster marketing companies

Jesus Christ has become an unlikely pin-up

Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
Rosetta space mission voted most important scientific breakthrough of 2014

A memorable year for science – if not for mice

The most important scientific breakthroughs of 2014
Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

Christmas cocktails to make you merry

Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
5 best activity trackers

Fitness technology: 5 best activity trackers

Up the ante in your regimen and change the habits of a lifetime with this wearable tech
Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

Paul Scholes column

It's a little-known fact, but I have played one of the seven dwarves
Fifa's travelling circus once again steals limelight from real stars

Fifa's travelling circus once again steals limelight from real stars

Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
Frank Warren column: 2014 – boxing is back and winning new fans

Frank Warren: Boxing is back and winning new fans

2014 proves it's now one of sport's biggest hitters again
Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

Jeb Bush vs Hillary Clinton

Karen Tumulty explores the power dynamics of the two first families
Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

Stockholm is rivalling Silicon Valley

The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

Crucified Santa: Urban myth refuses to die

The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

The Boy in the Dress: On set with the stars

Walliams' story about a boy who goes to school in a dress will be shown this Christmas