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The lessons from history as fears rise about UK growth

By Esmond Birnie, chief economist PwC NI

The most recent figures from the UK Office for National Statistics in mid-April indicated the level of productivity in the UK economy at the end of 2015 was hardly any higher than it had been in 20ww08.

Of course, there are some positive aspects to this; the lack of productivity growth was the flip side of a surprisingly rapid growth in employment. However, figures like this have caused some to wonder whether in the UK and more generally we are seeing an end to modern economic growth which has been mainly driven by technological change.

Let's try to put the most recent figures into some historical context.

If we accept the heroic estimates made by the economic historian Angus Maddison, then there was only marginal improvement in the level of output per head during the entire millennium and a half up to 1,500.

Thereafter, modern economic growth gradually accelerated. Maddison's figures for the average growth rates of UK GDP per head are as follows:

Average growth rate of UK GDP per capita in each time period:

1500-1820: 0.3

1820-1870: 1.3

1870-1913: 1.0

1913-1950: 0.9

1950-1973: 2.4

1973-1998: 1.8

1998-2007: 2.5

2007-2014: 0.2

Source: Maddison 2001, except 1998-2014 which was taken from the World Bank's database (2016).

In the history of British economic growth rate, two periods stand out when growth was relatively rapid - the Fifties to Sixties and then again in the Nineties to early "Noughties". Apart from that, growth rates were generally low. Since 2007 they have been very low indeed. US data may present a similarly gloomy picture. The American economist Robert Gordon has posed the question, "Is US growth over?" According to Gordon, growth in GDP per hour worked slumped badly in the Seventies and stayed at well below 2% until the mid-Nineties. After a decade of better performance during 1996-2007, productivity growth declined again after 2007; it was 1.8% during 2007-9, 1.3% during 2009-12 and 0.2% during 2012-14.

Reasons to be pessimistic

Could a slowdown in technological change explain the reduction in growth? Diminishing returns appear to have hit pharmaceuticals. Higher R&D spending has not seen a commensurate increase in the numbers of drugs.

Take micro-electronics - surely diminishing returns will eventually strike there too. Moore's law whereby the amount of capacity per unit keeps growing may eventually hit a physical limit.

Successive generations of nuclear reactors have cost more to construct - as the UK and French governments are now discovering. In defence aeronautics, the real cost of each generation aircraft is far higher than the previous one. Norman Augustine's "law" posited that on current trends the entire US defence budget would allow only one jet fighter to be operated in 2054.

Are we facing certain resource constraints, such as the supply of water?

A rather different argument is not that we are running out of ideas, but that rapid technological change comes in waves. Could it be that in the 2010s we are stuck in one of the lulls until the next long wave in technology rolls in? Certainly, over the last two centuries we have had a series of economy-wide changes in systems of technology, notably steam power, electricity, internal combustion engines and, most recently, IT.

Mid-20th century economists such as Schumpeter and Kondratiev pondered the extent to which such waves of technologies drove overall economic prosperity. To the extent that the last great swarm of innovation was given a tremendous push by the recovery from the Great Depression and the demands of the Second World War, then it was induced by very unusual historical circumstances.

Grounds for cautious optimism

Nevertheless, there are some reasons to be cheerful:

Global R&D is at extremely high levels - about $1.4trn.

There have never been so many graduate and technician engineers and scientists in the world. Globalisation and the larger market it's produced may lead to higher returns to innovation in future as billions of Chinese and Indian consumers and entrepreneurs join in.

Perhaps the Seventies deceleration in Western productivity growth owed a lot to rising oil prices.

It now looks as if the outlook for world energy prices may not be as gloomy as once feared; certainly the much vaunted "peak oil" hypothesis has not been realised and is not likely to be any decade soon.

The slowdown in R&D productivity in pharma may not be inherent but amenable to adjustments in the research process and greater use of more cost effective outsourcing.

So, the full benefits of investment in recent technologies may not yet have been felt. Advanced technology is being applied to more and more sectors.

When asked about the historical implications of the French Revolution, Seventies Chinese Premier Zhou Enlai said it was "too early to say". Something similar could be said about the full impact of, say, nano tech and genetics as they are applied across a wide range of sectors.

In next week's Economy Watch, we hear from Andrew Webb of Webb Consulting

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