Production 'could derail recovery'

Salisbury Journal: Low productivity levels could throw the recovery off track, according to the National Institute of Economic and Social Research Low productivity levels could throw the recovery off track, according to the National Institute of Economic and Social Research

The UK economy will return to its pre-recession peak within months but "abysmal" productivity levels could throw the recovery off track, according to a respected think tank.

The National Institute of Economic and Social Research (NIESR) increased its growth forecast for 2014 from 2% to 2.5%, with GDP finally returning to the pre-crisis levels seen in early 2008 in the third quarter of this year.

The NIESR forecast 2.1% growth for 2015, an increase from the 1.9% predicted in November last year, and 2.1% for 2016.

The recovery had been fuelled by the rapid expansion in consumer spending, which was now expected to grow at its fastest rate since 2003, the NIESR said.

But that spending rise was driven mainly by a buoyant housing market rather than an increase in real wages.

Principal research fellow Simon Kirby said: "Real consumer wages ... are currently 8% below what they were at their peak at the end of 2009. So while the UK economy is expected to pass through its pre-recession peak this year, there's still a number of years yet before we expect real consumer wages to regain their recent peak."

Unemployment levels are expected to drop through the Bank of England's 7% threshold early this year, but an interest rate rise is not predicted until the second quarter of 2015.

While the rise in employment was welcome, the NIESR raised serious concerns about the UK's productivity, which since 2008 has closely matched that of Italy and lagged behind competitors such as France, Germany and the USA.

"In the long run, rising standards of living can only occur through improved productivity," Mr Kirby said.

"If we do not see this materialise we may well continue to see this downward trend in real consumer wages and it does put at risk somewhat the recovery we are expecting to happen over the next few years."

Explaining why an interest rate hike was not expected even when employment dips below 7%, Mr Kirby said: " I don't think that the Bank of England is going to take a risk with a relatively weak recovery, by historical standards, for the UK and that's why it will stay its hand."

But he criticised the "uncertainty" that had been created by the Bank's communications over its forward guidance.

"Certainly it continues to reiterate the point about the 7% mark being a threshold rather than a trigger," he said.

"Nevertheless I think there is increased uncertainty about exactly what is going to happen. That hasn't been helped by the Bank of England's communications.

The NIESR said Chancellor George Osborne's current plans would see the public finances achieve a surplus in 2018-19, but warned protecting spending for budgets such as the NHS would make that task "rather difficult".

The Institute for Fiscal Studies (IFS) has said the Chancellor faced a "huge challenge" to meet his goal of returning the nation's finances to surplus by that date and the NIESR echoed that view.

The IFS's keenly-watched Green Budget found that, even with another £12 billion trimmed off welfare, the protection granted to areas like health and international development implied overall cuts for other departments of 30% since the coalition came to power in 2010.

Mr Kirby said: " The IFS have highlighted that may be rather difficult to implement in practice. It will certainly be rather difficult to i mplement if the policy of ringfencing key large spending departments were to continue through to 2018-19."

A Treasury spokesman said: "In their report today, NIESR provide further evidence that the Government's long-term economic plan is working, revising their forecast for growth this year up to 2.5%.

"But the report also highlights that the job is not done. That is why it's so important that we continue to work through the long-term plan that is delivering economic security for Britain's hard-working people"

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