BoE's Broadbent examines UK economic growth conundrum

Ben Broadbent, an external member of the Bank of England's Monetary Policy Committee (MPC), used a speech on Friday at the London School of Economics to address two questions relevant to the current debate over the economic recovery: why have real wages declined and should we expect them to pick up? And does the composition of growth today tell us anything about growth in the future?

Concerns about the absence of growth in the UK economy have been replaced with worries about the composition of economic growth, Broadbent said. "In particular, it is argued, the recovery will run out of steam without a rise in investment because of an ongoing contraction in real wages… Growth is therefore caught in a nasty scissor movement between a decline in real wages, which limits the room for further growth in household spending, and perpetually stagnant business investment."

He pointed out that wages have grown relatively faster than profits during this recovery, in contrast to the average post-recession experience. But, "for a variety of reasons, relative prices have moved against consumers", so that "what UK residents pay for their consumption has risen much faster than the price UK firms get for their output".

This can be put down to a rise in indirect taxes over recent years; movements in global prices that have increased the price of goods relative to services; and the weakness in aggregate productivity growth, which "has been much worse in sectors that produce consumer goods and services than in others."

However, he said, "there are signs these headwinds are beginning to abate. Tradable goods prices have stabilised, the services terms of trade have recently improved… and there has been no further rise in indirect taxes." That would, he said, "clearly benefit the purchasing power of UK income, wages included, supporting the real growth of consumption". The most important factor – the common driver of growth in both average earnings and GDP over time – is productivity, where "the majority of forecasters, including the MPC, also expect faster growth".