Where Will Growth Come From?                                                                                              ...
Where Will Growth Come From?                                                                    17/02/2011                ...
Where Will Growth Come From?                                                                                              ...
Where Will Growth Come From?                                                                                              ...
Where Will Growth Come From?                                                            17/02/2011                        ...
Where Will Growth Come From?                                                                                              ...
Where Will Growth Come From?                                                        17/02/2011                       But P...
Where Will Growth Come From?                                                                17/02/2011                    ...
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Economic growth 2011

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  1. 1. Where Will Growth Come From? 17/02/2011 Where will growth come from? Notes from lecture given by Prof John Van Reenen (LSE) 17 February 2011 A ‘V’ shaped recovery ... For now The Cycle: Growth in UK National Output Annual percentage change in GDP measured at constant prices 5 5 4 4 3 3 2 2 1 1 0 0 Percent -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 90 92 94 96 98 00 02 04 06 08 10 12 Source: UK Statistics Commissionwww.tutor2u.net 1
  2. 2. Where Will Growth Come From? 17/02/2011 Recent growth experience  A 6.5% decline in real GDP during the first 12 months of the recession – a decline of 1930s dimensions  But the subsequent recovery (of sorts) puts the recent UK recession on a par with of that the early 1980s  The coalition’s fiscal austerity program is the biggest budget cut since WWII  Austerity plan is to reduce deficit by 7% of GDP by 2015-16 with much of the pain front-loaded to 2011-12  George Osborne believes we don’t need a plan B but Van Reenen argues that we need a Plan V if trend growth is to be sustained Damaging effects of recession  Has there been a permanent fall in output?  Lots of uncertainty about this and the size of the output gap  Loss of output could be anywhere between 2-10% of GDP  Trend growth rate will have diminished – 2% may be the new normal for the UK due to hysteresis effects: ◦ Scrapping of human capital / people leaving the labour force ◦ Long term unemployment now 1/3rd of the total ◦ Scrapping of fixed capital / steep decline in capital spending ◦ Increased risk aversion of the financial system  Micro policies of the Coalition may also be undermining trend growth e.g. Universities and immigration caps  But recession and business shake-out may have lifted efficiencywww.tutor2u.net 2
  3. 3. Where Will Growth Come From? 17/02/2011 A fall in trend growth estimates UK - Potential GDP and Trend Growth Source: OECD World Economic Outlook 4.00 4.00 Estimated UK Trend Growth Rate Per cent per year 3.00 3.00 2.00 2.00 1.00 1.00 0.00 0.00 Real GDP £ (thousand billions) 1.40 1.40 thousand billions Potential GDP 1.30 1.30 1.20 1.20 1.10 1.10 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: OECD World Economic Outlook And high long term unemployment UKs Long Term Jobless Problem Millions, seasonally adjusted, using Labour Force Survey data 1.6 1.6 1.4 1.4 1.2 1.2 Unemployed for up to six months Persons (millions) 1.0 1.0 millions 0.8 0.8 Unemployed for over 12 months 0.6 0.6 0.4 0.4 0.2 Unemployed for over 24 months 0.2 0.0 0.0 92 94 96 98 00 02 04 06 08 10 Source: Reuters EcoWinwww.tutor2u.net 3
  4. 4. Where Will Growth Come From? 17/02/2011 Investment and Productivity Investment and Productivity in the UK Economy Quarterly value of capital spending at constant 2003 prices, index of labour productivity 102.5 102.5 100.0 100.0 2006=100 (millions) 97.5 97.5 millions 95.0 95.0 92.5 92.5 90.0 90.0 87.5 87.5 85.0 85.0 65 65 60 60 Real value of capital spending, £bn per quarter 55 55 £ (billions) billions 50 50 45 45 40 40 35 35 30 30 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Reuters EcoWin Fiscal austerity & public sector jobs 2011 will see a big public sector jobs squeeze UK Public Sector Employment as % of Total Employment 21.25 21.25 21.00 21.00 20.75 20.75 20.50 20.50 GBP (millions) 20.25 20.25 millions 20.00 20.00 19.75 19.75 19.50 19.50 19.25 19.25 19.00 19.00 02 03 04 05 06 07 08 09 10 Source: Reuters EcoWinwww.tutor2u.net 4
  5. 5. Where Will Growth Come From? 17/02/2011 Relative international performance  Using data for % annual change in GDP per capita from 1997-2010  The UK does not come out too badly! ◦ UK 1.19% ◦ USA 1.05% ◦ Germany 1.03% ◦ Japan 0.77%  Improved employment rates have helped  But key in the long run is higher productivity from our factor inputs and productivity gap remains Relative Productivity Improves  UK remains 13% less productive than the USA measured by GDP per hour, $PPP  There have been some improvements in overall GDP per capita in the UK  The GDP has closed with Germany and on some measures we have now overtaken them  Reasons: ◦ % of UK workers with a college degree has risen by 12% from 1997-2010 – up-skilling of labour force ◦ Increased intensity of competition in product markets ◦ Impact of foreign direct investment ◦ Better management practices from private equity boomwww.tutor2u.net 5
  6. 6. Where Will Growth Come From? 17/02/2011 Productivity Improvements UK Labour Productivity and the Cycle Annual % change in output per worker for the whole economy 4 4 Real GDP 3 3 2 2 1 1 Labour productivity 0 0 Percent -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 -6 -6 04 05 06 07 08 09 10 Source: Reuters EcoWin Output per person hour United Kingdom Labour Productivity Index of output per hour worked, whole economy, seasonally adjusted 105.0 105.0 102.5 102.5 100.0 100.0 97.5 97.5 95.0 95.0 92.5 92.5 Index 90.0 90.0 87.5 87.5 85.0 85.0 82.5 82.5 80.0 80.0 77.5 77.5 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Reuters EcoWinwww.tutor2u.net 6
  7. 7. Where Will Growth Come From? 17/02/2011 But Productivity Gap Remains (1)  1/ UK has an innovation deficit ◦ UK 2nd to US in terms of top scientific papers cited ◦ But commercialisation of innovation is weak – i.e. turning R&D into commercial patents with real value ◦ R&D as a share of GDP remains low and has actually fallen over the last 20 years despite many tax incentives ◦ Deep-rooted failures in the market for knowledge because ideas are promiscuous and the free- rider effect is hard to avoid But Productivity Gap Remains (2)  2/ Weaknesses in management practices apparent ◦ US firms seem to use ICT more effectively in long run ◦ UK management is mid-table by international standards on a par with Canada, Italy & Australia ◦ US economy appears better at weeding out weaker firmswww.tutor2u.net 7
  8. 8. Where Will Growth Come From? 17/02/2011 Intensity of competition does influence the quality of management  When market competition is fierce: ◦ Badly run firms more likely to exit (selection effect) ◦ Forces badly run firms to try harder to survive in their market (effort effect)  Family-run firms which are passed on tend to be relatively badly run ◦ Smaller pool of people to select CEO from ◦ Possible “Carnegie Effect” on future CEOs - if you know you will inherit the firm one day ◦ Less career incentives for non-family managers ◦ Might also be a lack of fundamental dynamism especially in small to medium sized family run enterprises Britain needs a Plan V (Viagra!)  Get the conditions right for long term growth  Stronger commitment to trade and competition  Incentivise R&D as social return is twice the private return  Tax reforms to remove 100% inheritance tax exemptions for family businesses to encourage improved management  Focus human capital investment at lower skilled and younger workers E.g., expanded apprenticeships  Avoid damaging migration caps and removal of teaching subsidies for universities – in a global war for talent  Focus on sector growth in industries where competitive advantage can be successfully nurtured and exploited. Namely...healthcare, niche manufacturing, green energy, universities, bio-pharmaceuticals, creative industrieswww.tutor2u.net 8

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