In a speech given at ratings agency Fitch’s London headquarters yesterday (15 February), Greene said while inflation was above target in both countries, the issue is of “greater concern” in the UK.
UK supply is measured by potential growth and Greene argued the UK has “long lagged behind on this metric”.
Potential growth in the UK was estimated by the MPC at 1% this year, rising to 1.3% in 2026. Meanwhile, in the US, the Congressional Budget Office estimated that US supply growth would rise from 2% to 2.2% between 2024 and 2026.
Productivity
Greene explained UK productivity is expected to remain “subdued” over the next two years, adding that between 2010 and 2019, UK potential productivity growth averaged 0.6%, below the 1.8% average in the decade before the Global Financial Crisis.
She noted that US productivity growth also moderated after the GFC but remained “stronger” than the UK.
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In the fourth quarter of 2023, US productivity enjoyed a growth boom as potential productivity hit 3.2%, a measure the CBO expects to ease but remain “well above” the UK between 2024 and 2026.
Greene, who has sat on the MPC since July 2023, cited investment as a way to boost productivity growth.
“The UK has seen roughly flat business investment between 2016 – when the Brexit referendum was held – and 2020, though it has grown moderately since the pandemic,” Greene said.
“The stark difference in investment growth between the UK and other advanced economies since the Brexit referendum strongly suggests this is one piece of the productivity puzzle.”
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The MPC’s latest forecast estimates a fall in business investment this year, stagnation in 2025 and growth of 3.75% in 2026.
Greene added: “In contrast, the US has led most other advanced economies in business investment since 2016 and considerably outperformed the UK. US business investment also saw a smaller fall during Covid-19 relative to peers.”
Labour supply
The impact of Covid-19 on UK and US labour participation has “differed significantly”, Green highlighted.
“The participation rate fell much more moderately [in the UK] than in the US. Much of the fall in the UK was driven by older people leaving the workforce. Overall participation in the UK has not recovered to the pre-pandemic trend, held back by those aged 50-69 not returning to the workforce and by long-term sickness.”
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Meanwhile, the US endured a sharp fall at the start of the pandemic but has recovered faster and now sits above the pre-Covid trend, she said.
“This has in part been led by working-aged women and workers with disabilities, who have seen their participation rates rising to record highs. This may be due to increased flexible working post-Covid.”
The CBO’s potential labour supply forecasts also expect an increase in prime age workers over the next ten years due to higher net migration.
Greene said: “The UK supply side of the economy is significantly more constrained than in the US. This is driven primarily by lower productivity growth in the UK, owing partly to weak business investment, and lower potential labour supply thanks to lower participation following the pandemic.
“The UK therefore has a lower threshold before increases in demand are inflationary. All else equal, the UK should be facing significantly more inflationary pressures than the US.”
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