British banks have almost recovered from the crisis — and it could end the UK’s lost decade of productivity growth

Silvana Tenreyro

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Silvana Tenreyro
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LSE

  • Bank of England’s Tenreyro says that the UK’s productivity growth is set to increase in the coming years.
  • 10 years since the financial crisis, Tenreyro believes that the UK’s banks are returning to normal and this will help boost productivity.
  • “The post-crisis productivity drag from finance should disappear as deleveraging runs its course,” Tenreyro said in a lecture at Queen Mary, University of London.

LONDON – Silvana Tenreyro, a member of the Bank of England’s crucial Monetary Policy Committee has sounded an upbeat tone on Britain’s sclerotic productivity growth, saying that the UK can improve its output by placing itself at the “technological frontier” in years to come.

Delivering the annual Peston Lecture at Queen Mary, University of London on Monday night, Tenreyro – who was giving her first public speech as a member of the MPC – also said that Britain’s banks are finally returning to normal after the trauma of the financial crisis, and are likely to help productivity rise in the UK going forward.

“The post-crisis productivity drag from finance should disappear as deleveraging runs its course,” Tenreyro said.

“The sector’s post-crisis performance has been as poor as its pre-crisis performance was strong. Credit and deposit growth have been weak as banks and households have sought to deleverage,” she continued.

“But those processes have largely run their course. Looking ahead, a neutral projection might assume that the performance of the finance industry begins to move in lockstep with aggregate GDP and productivity in the rest of the economy. Relative to the past few years, that would amount to a helpful boost to productivity growth.”

Here’s Tenreyro’s chart:

Screen Shot 2018 01 16 at 08.33.24

source
Bank of England

Prior to the crisis, the UK’s banks were one of the main drivers of growing productivity, but once it hit and losses started to mount, banks were forced to enter survival mode, helping drag on the UK’s overall productivity.

Growth has been virtually non-existent in the last 10 years, leading Bank of England Governor Mark Carney in December 2016 to describe the last 10 years as “the first lost decade since the 1860s” when “Karl Marx was scribbling in the British Library.”

During her speech, Tenreyro also urged that the markets to not overestimate how quickly the BoE is set to raise interest rates going forward. The bank hiked for the first time since the crisis last November, and indicated that further hikes would be forthcoming in 2018 and 2019. Tenreyro, however, is in no rush.

She did, however, acknowledge that “if the economy evolves as in our November forecast, with steadily increasing domestic inflationary pressures, I expect perhaps a couple more increases in Bank Rate will be required over the next three years.”