Harry Potter and the Bank of England's Productivity Policy Maker
(Bloomberg) -- Britain’s famous boy wizard may have the magic to revive the U.K. economy, according to the Bank of England’s newest policy maker Jonathan Haskel.
The problem is weak productivity, and he says part of the solution might just be found in intangible things like Harry Potter’s spells. As the Monetary Policy Committee gathers in London this week ahead of their announcement Thursday, McKinsey & Co. warns that 90 percent of future U.K. growth will need to come from improvements in that area if the economy is to keep pace with historical rates.
That’s a big ask for a country where growth in output per hour has yet to recover to pre-crisis levels and lags that of many European peers. Flash figures for the second quarter published last month show it rose 0.4 percent, leaving productivity up just 1.5 percent on the year.
For Haskel, a professor at the capital’s Imperial College Business School, the outlook may not be as bleak as data suggests. He bases his more optimistic view on the growth of hard-to-measure investment in “intangible” assets, such as software and design, that he says have the potential to deliver significant productivity gains in the longer term.
“Think of Harry Potter,” he told lawmakers in July. “It’s the creative copyright from the book, it’s the software that goes into the movie, it’s the branding, it’s the set design which gives you all these kind of Gothic decorations that you see in the film and in the play -- a whole bundle of intangible assets. The economy is moving much more in that direction.”
The difficulty with trying to measure these types of investments -- some of which, he believes, are excluded entirely by the Office for National Statistics methodology -- means they are probably underestimated.
To add to policy makers’ challenge, the productivity conundrum is increasingly being laid at their door. Some opposition Labour Party lawmakers have suggested their role should be formalized with a 3 percent goal added to their remit -- something even BOE Chief Economist Andy Haldane points out is largely beyond the reach of their current toolkit.
“Central banks do not build roads or railways, or hospitals or schools; they don’t train apprentices and they don’t, by and large, teach school children,” he told parliament’s Treasury Committee last week. “Longer term, those are the things that determine it.”
Adding to the urgency is the risk that muted productivity could mean even a modest wage pickup fuels inflation as companies raise prices to protect their margins. Data Tuesday showed U.K. pay growth accelerated over the summer amid the lowest jobless rate in more than four decades.
Haskel’s view gives no clear direction on where his monetary policy inclinations may lie, according to Vicky Pryce, who was joint head of the U.K.’s Government Economic Service, a professional body for public-sector economists, from 2007 to 2010. While higher levels of investment could suggest the underlying strength of the economy is greater than appreciated, and thus support the need for higher rates, they could also lead policy makers to the opposite conclusion.
“If investment is actually higher and the potential for investment is higher, then you grow faster for longer without necessarily affecting inflation,” Pryce said in a telephone interview.
Whatever his view, Haskel seems unlikely to break ranks when he votes this week. After increasing in borrowing costs to the highest since 2009 in August, officials are expected to unanimously opt to keep rates on hold at 0.75 percent. Governor Mark Carney has said any future increases will be limited and gradual.
“Before we get a clearer steer, we think it’s sensible to assume that Mr Haskel will slot into the MPC’s consensus position,” HSBC economist Chris Hare wrote in an emailed note. “The committee does not appear to have acquired an arch dove.”
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