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Medium/long term growth prospects for the UK Nick Oulton Centre for Economic Performance London School of Economics Welsh Government Conference on Recession.

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Presentation on theme: "Medium/long term growth prospects for the UK Nick Oulton Centre for Economic Performance London School of Economics Welsh Government Conference on Recession."— Presentation transcript:

1 Medium/long term growth prospects for the UK Nick Oulton Centre for Economic Performance London School of Economics Welsh Government Conference on Recession and Prospects for Growth, Cardiff, 18 October 2011

2 OUTLINE Prior to the financial crisis, the UKs productivity performance was good. The UK was also rapidly increasing its ICT intensity. The main effect of the crisis will likely be on the level of GDP. The long run growth rate will (probably) not be affected. ICT will continue to have an important and positive effect on UK growth. 2

3 BACKGROUND Earlier work N. Oulton, Journal of Monetary Economics, 2007 N. Oulton, CEP Discussion Paper no. 1027, November 2010 Data EU KLEMS Database, November 2009 release Market sector can be broken out Methodologically consistent ICT income and output shares available for 19 countries, of which 15 in EU ICT relative prices: U.S. NIPAs 3

4 4.26 4.07 3.91 3.85 3.79 3.64 3.47 3.46 3.21 3.09 2.53 2.08 1.89 1.85 1.83 1.52 0.511.522.533.544.55 Japan Ireland Finland Belgium France Spain Austria Denmark Netherlands Germany Italy Sweden U.K. Canada Australia U.S.A. Mean growth rate, 1970-1990, % p.a. Real GDP per hour in the market sector 4

5 3.57 3.49 3.23 2.87 2.44 2.36 2.29 2.06 1.96 1.84 1.83 1.70 1.64 1.46 1.15 1.01 0.511.522.533.54 Ireland Finland Sweden U.K. U.S.A. Austria Japan France Australia Belgium Germany Canada Netherlands Denmark Spain Italy Mean growth rate, 1990-2007, % p.a. Real GDP per hour in the market sector 5

6 Long run growth in the one-sector model 6

7 7

8 A growth theory perspective Two ratios matter: ICT share of income (β)--- Profit attributable to ICT assets as a % of GDP ICT share of output --- value added in ICT production as a % of GDP 8

9 Long run growth in a two-sector model Assume that ICT is a second form of capital, that all ICT goods are imported, and there is no ICT production. Then: ICT use effect 9

10 Long run growth, with some ICT output ICT output effect 10

11 0 2 4 6 Beta, % 19701980199020002007 year ICT income share in the UK, % of GDP 11

12 01234567 Sweden U.S.A. U.K. Finland Denmark Belgium Australia Japan Hungary Netherlands Canada France Spain Czech Rep. Germany Austria Italy Slovenia Ireland Note Mean of 2000-latest year, market sector Income share of ICT, % 12

13 13 012345678 Finland Ireland Hungary Japan Germany Slovenia Czech Rep. Sweden Austria U.S.A. Denmark Italy France U.K. Belgium Spain Netherlands Canada Australia Note Mean of 2000-latest year, market sector Output share of ICT, %

14 14 Sweden U.S.A. Finland Australia Belgium Denmark Japan U.K. Hungary Canada Czech Rep. Spain Netherlands France Austria Germany Ireland Italy Slovenia Note Calculated using shares averaged over 2000-latest year; ICT relative prices assumed falling at 7% p.a. ICT use effect on long run growth of consumption and GDP, pppa

15 15

16 Terrific!... But havent you forgotten the Great Recession? Was the preceding boom partly an illusion? What will be the effect of the recession on the GDP growth rate? What will be the effect of the of recession on the GDP level? 16

17 Was the boom a statistical illusion? A large part of growth in the boom was due to growth of the financial services industry. This was mostly toxic rubbish and wont be repeated. So the past was not as good as we thought at the time. WRONG: the ONS measures real annual growth largely from the expenditure side [C+I+G+X-M]. Quarterly growth is adjusted to fit the annual path (with a lag). Most of the toxic rubbish is intermediate, so drops out of the expenditure side. The contribution of financial services to the expenditure side measure of GDP is mainly FISIM sold to households (2.7% of GDP in 2008). The toxic rubbish is in net exports (quite small: 1.5% of GDP in 2008). 17

18 Long run outcome of the Great Recession 18

19 Effect of recession on the growth rate 1.TFP is meant to be what comes for free. But in practice measured TFP growth may include the effects of intangible investment which is mis-classified as current spending (R&D, design, training, etc) [Corrado et al. (2009); Marrano et al. (2009)]. This type of spending has likely fallen in the recession along with measured capital investment (e.g. BERD fell by 4.1% in 2009 over 2008 [source: ONS]). So measured TFP growth is likely to fall in the short run. 1.The Great Recession may lead to changes in institutions and policies which impact the long run growth rate. After all, we are still living with the consequences of the 1 st World War and the Great Depression --- world trade was freer before 1914 than it is today. Upside: Reform of the banking system will make the economy safer (end to boom and bust?) Downside: World-wide collapse into protectionism, revival of industrial policy and of cartelization (a rerun of the 1930s) [Broadberry & Crafts, 1992] 19

20 Effect of recession on GDP growth rate Conclusion: In the absence of large changes in policy, no long run effect on growth rate. 20

21 Effect of recession on GDP level: theory 1.If interest rates are higher post-recovery, then K/L will be lower and consequently Y/L will be lower too. But effect is small, e.g. 0.5% of GDP. 2. In short/medium run higher unemployment causes loss of human capital but this effect disappears in long run (through death or retirement). 21

22 Effect of recession on GDP level: empirics 1. Great Depression in the US Perron (1989); Ben-David et al. (2003): The Great Depression reduced the long run level of US GNP by about 17- 19%, but left the long run growth rate unchanged. Recall that the US depression started in the US in 1929, that the peak-to- trough decline in GNP was about 27%, and that real output did not regain its 1929 level till 1939. 2. Post WWII banking crises Cerra and Saxena (2008); Furceri and Mourougane (2009): These studies find large effects of banking crises on GDP levels but do not distinguish clearly between short run and long run effects. 3. Provisional result Based on 61 countries, 1950-2010, and Reinhart-Rogoff data on banking crises, the average effect of a banking crisis is to reduce the level of GDP per worker by 0.8% for each year of crisis, i.e. by 4% for a 5 year crisis. 22

23 Conclusions Most of the gains in productivity growth come from ICT use, not ICT production. The future impact of ICT on long run productivity growth in the UK, at the present level of ICT intensity, is large: about 0.6 percentage points per annum. Factors favouring ICT adoption --- low levels of labour and product market rigidities, high level of graduate education --- may also favour innovation and hence TFP growth in general. The Great Recession may reduce the level of labour productivity by as much as 4%. But it probably wont reduce the long run productivity growth rate. 23

24 THE END 24

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