Pandemic set to boost productivity, says Bank of England chief economist

By on 02/07/2021 | Updated on 07/07/2021
The pandemic-driven shift to remote working may help shift growth beyond the major cities, said Haldane – pictured here on a visit to Blackpool. Picture by Bank of England

Leaving the Bank of England after seven years in the chief economist’s job, Andy Haldane painted an upbeat picture of the economic outlook as the pandemic eases: the UK has avoided serious scarring, he argued, while the shift to digital working should boost productivity. But as Elaine Knutt heard, the picture on Brexit isn’t as rosy

The Bank of England’s outgoing chief economist, Andy Haldane, has said that he’s increasingly optimistic that the UK economy will escape long-term “scarring” from the COVID crisis, suggesting that the digitalisation of economic and social life during the pandemic may help lift the country’s flatlining productivity.

Speaking on an Institute for Government webinar to mark his imminent departure, Haldane argued that the pandemic-driven imperative to get “digitally match-fit” – at an individual and organisation level – will pay dividends for productivity, growth and the regional “Levelling Up” agenda.

He also argued that the experience of the 2008-9 global financial crisis has given governments and central banks valuable experience in flexing their muscles in response to a crisis, leaving them in a stronger position to deal with the pandemic.

But the relatively upbeat assessment on COVID put the economic impact of Brexit into sharper relief, with Haldane noting that its long-term consequences for the UK’s trading position will be to “slim the degree of trade within the EU” and impact on exporters’ growth.

In the webinar, hosted by institute director Bronwen Maddox, Haldane was looking back on 32 years at the Bank of England, which he joined in 1989 as a graduate trainee, and forward to his new role leading the Royal Society of Arts, Manufactures and Commerce. Appointed chief economist at the Bank in 2014, Haldane is also leaving his position as a member of the Bank’s Monetary Policy Committee.

Whatever doesn’t kill you…

In the discussion with Maddox, Haldane said that the shock of COVID resulted in a “25% peak to trough collapse” in economic activity in the UK, but the government’s equally extraordinary “double-barrelled response in fiscal and monetary policy” had proved protective.

Indeed, following a decade-long period of flatlining UK productivity, he suggested that the pandemic experience has given many organisations and workers a digital “leg-up” that could enhance future productivity.

“Many of us, of necessity during the crisis, were required to get ourselves match fit digitally, and that’s true of a whole bunch of businesses. Investment in digital buying in companies has picked up very materially over the last 18 months or so, although overall business investment has contracted sharply. Spending on digital has gone through the gears and that ought to deliver some longer-term benefit, we hope,” he said.

“Accompanying that, we’ve seen many more people, probably even including you and I, who have had to brush up on digital skills, and in terms of both digital kit and skills have been given a leg-up by COVID. Does this give us something to build on? I hope so, and I hope that some existing government initiatives might provide further impetus for that improvement.”

He then referred to the government’s Help to Grow scheme, a 12-week programme for small and medium sized businesses to boost digital and managerial skills.

Home-working is working

One factor that could plainly boost productivity, he said, is the reduction in “the least productive forms of human activity ever invented, which is to say commuting”.

“If we take at least some commuting out of the equation, that should enable us as workers, to – on average – be a bit more productive in the workplace,” he continued. “So I think it’s plausible that COVID could, even longer-term, deliver some supply-side benefits, not scars, to the economy.”

One questioner asked whether post-COVID, hybrid working – mixing home and office working – will boost economic growth outside the major cities and contribute to the “Levelling Up” agenda.

Haldane replied that it’s difficult to predict whether the current trend of individuals moving to “suburban or rural retreats” will continue. But “if some of these trends prove to be more persistent, and that would be my view, then both the location of businesses and the location of workers in those businesses would be less tied to our large cities in the future than in the past.…

“What are sometimes called those agglomeration benefits of economies of scale and economies of scope won’t disappear, but that degree of magnetic attraction will be somewhat less powerful than it has been in the past, for people and businesses.

“That provides something of a tailwind to the levelling up agenda, having been a fairly obvious headwind to levelling up pre-COVID, as businesses, people, money and cultural capital crowded in to our already pretty prosperous bigger city centres.”

Slimming not scarring

Asked to compare the relative effects of Brexit and COVID, he noted that the overall “slimming” effect of Brexit on the UK’s trade with the EU has now been factored into the Bank of England’s economic projections, but it will inevitably “chip away a little bit of the UK economy productive potential” on the supply side.  

COVID is a “more open question”, but he added that early fears of the virus’s economic impact have been mitigated, “not least as a result of policy action … to lower those long-term scarring costs, learning our lessons from the early ‘80s, the early ‘90s and indeed the global financial crisis.”

Haldane’s CV includes a stint as chair of the government’s Industrial Strategy Council from its inception in November 2018 to its demise in March 2021, when business secretary Kwasi Kwarteng decided to “depart from the industrial strategy brand” in economic planning.

In 2009, Haldane co-founded a charity called Pro Bono Economics, currently chaired by former cabinet secretary Gus O’Donnell, which uses policy research and economic skills to benefit charities, social enterprises and the third sector.

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