But even so, this skewing would have to be very marked to have had a material impact on the quality of the capital stock.11 The capital stock is also likely to have been eroded by increased levels of capital scrapping, as some companies were forced out of business and others scaled back their operations in order to survive. Although increased levels of capital scrapping are likely to have played some role, they seem unlikely to provide the key to the productivity puzzle. In particular, although corporate liquidations have increased in the recession, that increase has been relatively contained and significantly less than we might have feared given the depth of the recession. Rather if the evidence from the business surveys is to be believed, and the growth of productive potential in the manufacturing and services sector has indeed largely stalled in recent years, this is more likely to reflect a slowing in total factor productivity (or TFP for short). I know what some of you might be thinking: this sounds like another one of those unobservable, abstract concepts so beloved by economists, but with little connection to the real world. And you would have a point! But think of it as efficiency gains. The fact that companies, as they hone their working practices and improve their internal processes, are able to increase the amount of output they produce for a given level of labour and capital input. Did the financial crisis and recession dampen the pace of efficiency gains in our economy, at least temporarily?
And as I’ve just discussed, the growing belief that the degree of spare capacity in our economy was probably less than might appear at first sight. But I also suggested that policymakers should approach their task with considerable pragmatism, and that if some of the downside risks to growth materialised, I’d reverse my vote. And that indeed is what has happened. The outlook for demand over the past few months has weakened quite materially. Consequently, at the August MPC meeting, I reversed my position and voted to maintain Bank Rate at 0.5% and the stock of asset purchases at £ billion. And as shown in the minutes published this morning, I voted the same way at this month’s MPC meeting. So what has happened to our economy over the past few months? The deterioration in the outlook largely reflects developments outside of our shores. Growth in the world economy, including in our core trading partners in Europe and the US, has slowed. Concerns about the fiscal positions of some countries, particularly within the euro area, have intensified. This in turn has fuelled worries and uncertainties about the resilience of the international banking system. And perhaps most fundamentally of all, confidence that the authorities have the ability to respond to these challenges in a decisive and timely  BIS central bankers’ speeches  7  manner has diminished. These four factors have fed on each other, leading to a pronounced downward spiral. The UK has been caught in the fallout from these external developments.