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Medium and Long Run Prospects for UK Growth in the Aftermath of the Financial Crisis

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  • Nicholas Oulton

Abstract

The productivity performance of the UK economy in the period 1990-2007 was excellent. Based entirely on pre-crisis data, and using a two-sector growth model, I project the future growth rate of GDP per hour in the market sector to be 2.61% p.a. But the financial crisis and the Great Recession which began in Spring 2008 have dealt this optimistic picture a devastating blow. Both GDP and GDP per hour have fallen and are still below the level reached at the peak of the boom. So I discuss a wide range of hypotheses which seek to explain the productivity collapse, including the impact of austerity. Most of the conclusions here are negative: the explanation in question doesn't work. I next turn to the long run impact of financial crises, particularly banking crises, on productivity, capital, TFP and employment. Based on a cross-country panel analysis of 61 countries over 1950-2010, I argue that banking crises generally have a long run impact on the level of productivity but not necessarily on its long run growth rate. I therefore predict that the UK will eventually return to the growth rate predicted prior to the crisis. This prediction is conditional on the UK continuing to follow good policies in other respects, in particular not allowing the government debt-GDP ratio to rise excessively. Nonetheless the permanent reduction in the level of GDP per worker resulting from the crisis could be substantial, about 5½%. The cross-country evidence also suggests that there are permanent effects on employment, implying a possibly even larger hit to the level of GDP per capita of about 9%.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Occasional Papers with number 37.

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Date of creation: Oct 2013
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Handle: RePEc:cep:cepops:37

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Keywords: productivity; potential output; growth; financial; banking crisis; recession;

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