We forecast also a return to productivity growth – a real casualty of the recession – that would drive higher pay and hence provide a more sustainable base for consumer spending. And, as a corollary of higher productivity we thought the growth in output would be accompanied by a slower fall in unemployment. So overall, our expectation at the time I joined was that the recovery would broaden out in 2014. But over the year the boost from pent up demand would fade and as a result growth would begin to fall back from very strong rates to a pace around its historic averages. Three other MPC judgments from my first meeting and Inflation Report are also worth recalling. BIS central bankers’ speeches  1  First, we did not think the UK economy would get much help from the rest of the world. A combination of relatively weak growth in the parts of the word that mattered most for UK exports, particularly the Euro area, and the disappointing performance of UK exports in recent years led us to believe that the UK’s net trade would not provide a material contribution to growth. Second, while we expected productivity growth to pick up in 2014 we did not forecast that the UK would recover any of the very substantial amount of productivity growth, 14% relative to the pre-crisis trend, that had been “lost” in the five years since the crisis.
Even adjusting for that effect though, unit labour costs look broadly flat – much below the 2% rate of increase we need to meet the inflation target in the medium term. The big surprise, therefore, for the MPC – and it is a positive, if puzzling, development – has been the extent to which employment has been able to grow without generating clear inflationary pressure. Understanding why that has happened and how long it will persist is, in my view, now key to deciding policy. One possible explanation is simply a longer-than-usual lag between falls in unemployment and pay pressure emerging. Once you take into account productivity, the unexplained weakness in wages only really materialised over the last three quarters, a period over which unemployment was falling very rapidly. Some survey measures suggest the pay of newly hired employees is growing at a much faster rate, of between 2% and 6%, rather than the 1% rate seen across employees as a whole in the official data. On this view, a rapid pick up in average pay levels is in prospect, once more and more workers start to shift jobs and as pay of existing employees is adjusted in annual pay rounds. The parable of the rock pulled by the elastic band is a very relevant one in economic policy making: the rock may not move for a long time, but eventually it will. And the longer it takes to move the faster the move is likely to be.