But our productivity growth has been dismal How is it possible for us to have grown relatively strongly with poor productivity performance but without generating inflation pressure? The answer is simple. We have grown by using the spare labour supply in the economy after the great recession. This spare labour supply was not just the post-recession stock of unemployed workers. It was also people who were in work but wanted to work longer hours. It was people who were not previously participating in the workforce who now wished to work. It was people who we would have expected to retire but who decided to stay in work. And it was workers from abroad. It is true to say that this reservoir of labour supply available to the economy has been larger and deeper than we or others would have predicted on pre-crisis trends. We have had what economists would call a “positive labour supply shock”. The crisis, recession and hit to living standards have clearly changed attitudes to work; more people want to work and work more hours than before. And the impact of those two domestic trends – higher participation in the workforce and people wanting to work more hours – are the most important elements of this positive “shock” relative to what we expected, outweighing factors like higher net inward migration. The numbers are striking. In the 10 years prior to the crisis, growth in the hours worked in the UK economy, accounted for 23% of the UK’s overall economic growth.
But demographic shifts can also impact the macroeconomic environment more broadly. I will briefly discuss the impact of demographic shifts on potential growth and monetary policy. Then, I will discuss other likely macroeconomic and financial stability outcomes, via the impact of ageing on savings and investment. 1. Direct impact on potential growth and monetary policy  Ageing can weigh on monetary policy notably through its impact on potential output. For a central bank, potential output and output gap developments are of major concern. From a more practical point of view, among many other measures, the Eurosystem uses Taylor-like rules to determine its monetary policy stance. According to these rules, the central bank’s rate should be close to the natural interest rate, i.e. the rate consistent with output at its potential level and stable inflation. The difficulty lies in how to assess the gap between observed and potential output. You see that potential output matters in our reaction function and since demographic developments are a key parameter for potential output, demographics ultimately directly concern monetary policy as well. What are the main consequences of demographics for potential output? The decline in the working age population due to ageing should negatively affect potential output in the long run, through the decrease in the labour force contribution and productivity, all other things being equal.