Low productivity poses risk to Britain's recovery - NIESR

LONDON Fri Feb 7, 2014 7:29am GMT

LONDON (Reuters) - Britain's economy will pick up pace this year but lagging productivity poses a risk for the country's medium-term outlook, a leading economic research body said on Friday.

The National Institute of Economic and Social Research expects the economy to grow 2.5 percent this year, raising its forecast from 2 percent in November and bringing its view into line with the consensus in a Reuters poll last month.

NIESR then expects growth to ease to 2.1 percent in 2015, a slightly sharper slowdown than most other economists expect.

Britain posted 1.9 percent growth in 2013 - its fastest since the financial crisis - but the rebound has relied heavily on consumer spending, raising doubts over how long it can last as wage growth fails to keep pace with inflation.

While NIESR expects consumer spending to remain the key driver of growth over the next two years, underpinned by a buoyant housing market, it also predicts that "robust growth" in business investment will support the recovery.

But low productivity would continue to pose a challenge for the economic outlook as it limits wage growth, it said.

"Our forecast remains one of a gradual improvement in productivity, but continued stagnation poses a downside risk to the UK's medium-term prospects," NIESR said.

The rebound in growth and employment has not brought about an upturn in workers' productivity, which fell sharply at the start of the financial crisis.

A monthly survey from the Recruitment and Employment Confederation, also released on Friday, showed a further big rise in permanent and temporary appointments last month after the latter saw the sharpest increase in 15 years in December.

Demand for staff grew at the fastest rate since 1998, fewer candidates were available and permanent salaries rose strongly.

Although the REC survey is not fully representative of the British labour market as a whole, it does raise questions about how much scope there is for Britain's economy to grow without hitting the capacity constraints which NIESR fears.

This so-called 'productivity puzzle' also has important implications for the guidance the Bank of England has given on the future path of interest rates.

The BoE linked the unemployment rate to its thinking on interest rates last year, on the basis that it provided some insight into the amount of slack in the economy - how much room an economy has to grow before causing inflation.

However, the speed at which the unemployment rate has fallen has caught the Bank off guard and raises questions over the credibility of its "forward guidance" policy, NIESR said.

NIESR expects the unemployment rate to fall below the 7 percent threshold for considering rate hikes early this year, having already reached 7.1 percent in November. The BoE originally forecast that level would not be reached until well into 2016.

(Reporting by Ana Nicolaci da Costa and David Milliken; Editing by Toby Chopra)

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