But these effects are longer-lived in a secular stagnation world. It is quite possible that we are in some combination of both worlds. But I think it is important, especially when thinking about policy, to distinguish the different forces that drive these respective stories about the world. The UK picture Which brings me to the UK. When I joined the MPC over two years ago, the data seemed to point quite firmly towards the healing story. The UK was experiencing a burst of growth, driven by the return of credit and confidence and pent-up demand from the recession and slow recovery. Many commentators were arguing that the Bank was in danger of getting behind the curve; these arguments grew louder as unemployment fell at its fastest rate for 40 years. The Bank’s forecasts two years ago suggested that growth would fall back a touch, but only a touch, to around its pre-crisis average of 0.7% per quarter. Our forecast for growth in 2014,15,16 was 3.4%, 2.7% and 2.9% respectively. The reality has confirmed part but only part of that story. Over the course of 2014 and 2015 growth drifted down, slowly but consistently and by more than forecast. The economy grew at around 2% annualised in the last quarter of 2015 – around 0.7 percentage points lower than the February 2014 forecast; growth in 2015 was 0.2 percentage points lower. The Bank’s most recent forecast is for growth to pick up slowly over the next few years to 2.5%.
We are in a “secular stagnation” world but have not fully woken up to it. There are different hypotheses as to why we might be in such a world. One is that we are stuck in an era of very low demand because there are more savers than opportunities to invest. This is due to fundamental factors such as demographic changes, inequality and preferences for low-risk assets. When the supply of savings exceeds demand for borrowing the price – i.e. the natural real interest rate – goes down. If this natural real interest rate is pushed down below zero and held there by this imbalance between supply of savings and demand for borrowing, central banks can’t push demand back up and economies remain stuck. In this world, neither central banks nor the private sector can easily break the cycle; the government has to step in to borrow massively to invest thus correcting the imbalance of savers and borrowers and pushing the natural interest rate back up. Another, somewhat different take, is that we are stuck in an era not of low demand but of low supply growth. In this view, productivity growth slowed in the 1970s after the benefits of the Second Industrial Revolution had finished working through. And, despite the manifest technological developments, such as ICT, technological change has not since had an equivalent impact on productivity. Or, as Peter Thiel said: “we wanted flying cars, instead we got 140 characters”.