Since June 2009, economic activity has grown – but not robustly. 2  BIS Review 141/2010  In recent months, the momentum has slowed. After rising at a 3.25 percent annual rate during the second half of 2009, real gross domestic product growth has slowed. With demand growth barely keeping pace with firms’ ability to increase productivity, job creation has been too weak to significantly reduce unemployment, which stands today at 9.6 percent. And, as is typical in such circumstances of considerable slack, the rate of inflation has declined. Why are we experiencing this soft patch now? There are several reasons:   In its first year, this recovery – as is typical – benefited from firms replenishing their inventories. But this effect is now petering out.   The growth impulse from the 2009 fiscal stimulus package is beginning to wane.   The usual hand-off from inventory-led growth to private final demand is not yet fully established. Instead, we have ongoing sluggishness in two key sectors that have led past recoveries: consumer spending and housing. The slow recovery of consumer spending and housing in the face of very substantial monetary and fiscal stimulus reflects the painful unwinding of the dynamics at work during the expansion that preceded it. Beginning around 2003, underwriting standards for residential mortgages were significantly relaxed, leading to a sharp rise in household borrowing and in home prices.
This stocktake was especially important in light of the unusual times the UK finds itself in and the 6 7  Ramsden (2017) Haldane (2017) 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  importance of supply-side developments for the economic outlook. We didn’t change our assessment of underlying productivity, but we have revised down our assessment of spare capacity within firms, which has implications for actual productivity growth in the short term. Productivity growth is the key determinant of the economy's potential growth rate, the rate at which the economy can grow without generating inflation pressures, in other words its speed limit. The most recent data show signs of productivity growth rising in the second half of 2017. But quarterly growth has been volatile of late and we’ll have to wait and see whether the pickup is sustained in the near-term. The MPC’s best collective judgement is that productivity growth will settle at just over 1% over the next three years. That is a pickup from the pace since 2010, but it is still around half the pre-crisis rate. But in terms of the economy’s potential growth rate, these hints of somewhat higher productivity growth need to be balanced by the prospect that workforce growth will slow somewhat, due to lower inward migration and demographic effects. Overall, it’s the MPC’s view that the economy’s speed limit is likely to be around 1½%.