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BoE: Low interest rates keep businesses afloat but hamper productivity

UK productivity growth remains 4% below pre-crisis peak

LOW RATES of business failure have held back the UK’s productivity recovery, a Bank of England report has found.

Productivity remained “considerably weaker” than in other advanced economies, particularly in regards its growth pre-crisis, the BoE said in its latest quarterly bulletin.

“Even six years after the initial downturn, the level of productivity lies around 4% below its pre-crisis peak, in contrast to the level of output, which has broadly recovered to its pre-crisis level,” the report said.

Whole-economy output per hour stands at around 16% lower than its pre-crisis trend prediction, despite “modest improvements” in 2013. Measurement issues and natural decline in output from mining and extraction industries were estimated to account for four percentage points (pp) of this.

Impaired resource allocation and unusually high firm survival rates potentially accounts for the highest proportion of the deficit – up to 5pp, the report suggested.

A lower level of company liquidations through the financial crisis has been accompanied by a significant increase in loss-making firms, the bank said.

Forbearance agreements, HM Revenue and Custom’s ‘Time-to-Pay’ scheme and low interest rate levels were found to have contributed to the numbers of so-called ‘zombie’ businesses, which have stayed afloat but are failing to increase output.

Research showed commercial banks view the low bank rate as a more significant factor in stopping businesses going to the wall, over forbearance or other arrangements, the report said.

Productivity in SMEs in receipt of forbearance can be up to 40% lower than in peer companies. However, only 6% of SMEs were in receipt of forbearance, which would impact private sector productivity by around 1pp. The overall impact may have been greater than this as not only SMEs entered such arrangements.

HMRC’s Time-to-Pay scheme, which peaked in 2009 with 5% of tax-registered businesses approved for tax extensions, also contributed to the low level of business failure.

While the low rate of business failure is likely to have materially impacted productivity growth by around 5pp, the report added there are “important benefits” of fewer company failures, including lower unemployment and smaller losses to GDP and general welfare.

The BoE concluded there remains “considerable uncertainty” over strengthening of productivity, depending on improving demand conditions and “a reduction in macroeconomic uncertainty or an improvement in credit conditions”.

Last week, BoE governor Mark Carney told UK businesses to prepare for initial interest rate rises this year, after previously suggesting the bank rate would not be increased from its current historical low of 0.5% until 2015 at the earliest.

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One response to “BoE: Low interest rates keep businesses afloat but hamper productivity”

  1. The world needs to face up to financial reality; not economic predictions. Many failed companies are kept afloat courtesy of accommodating monetary policies. Capitalism must be allowed to work and failed companies – even banks – made to suffer the consequences of their past actions. Governments should let them go bust instead of propping them up at the taxpayers’ expense.

    We would not be in the present mess had prudent financial reporting not been ditched for fair value accounting which reports expected rather than actual gains and which prohibits provisions being made for future losses.

    Accounting concepts properly defined need to be reintroduced for economic stability in the wider public interest. IFRS should not just focus on the needs of short-term stakeholders, thereby creating volatility.

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