The Uk economy has performed quite well recently if you take into account the damage done by declining oil and gas production, by the impact of the financial crash on the lead financial sector, and the collapse of construction activity which is also the direct result of the boom and bust building and investment finance of the last decade.
As I have argued before, there is no “productivity puzzle” as the Bank suggests. UK productivity has fallen and employment risen in the last two years owing to large structural changes in the economy. It is good news that there are many more jobs, reflecting growth in numerous UK sectors.
A further decline in oil and gas output means the losss of highly productive and valuable output and some of the jobs with high wages traditional in the sector. In 2012 gas output from UK production fell by 14.1% and oil output fell by 14.3%, an unusually large fall. Quarter 4 2012 oil and gas production was 20% down on Quarter 4 2011. Most of this decline was unavoidable, reflecting the ageing reservoirs with much of the valuable material extracted in earlier years. A more favourable tax regime introduced recently may stimulate enough oil and gas exploration to stop the decline or reverse the decline in due course, but the previous government simply presided over decline.
The financial services and banking sector grew at twice the pace of the economy generally in the decade up to 2007, and generated large amounts of tax revenue to pay for welfare and public services. It was Labour’s favourite helper with the expansion of public spending, with Labour politicians especially keen on promoting RBS and Northern Rock from their northern bases. That went into sharp decline during the crash, and fell 10% by 2010. It is still unable to grow and produce profits and tax revenues in the way it did, with the largest bank still mainly owned by taxpayers and making losses.
Construction too has been struggling. Housebuilding collapsed along with the crash of the mortgage market and the distress of four major mortgage banks during the Credit Crunch. Labour cut public capital spending just before leaving office, cuts which the Coalition largely accepted. Private sector investment has also been constrained by a lack of confidence resutling from the Crash and by the fall in domestic demand the Credit Crunch created.
If you allow for these large falls in activity in three important areas, it shows that the rest overall is growing. We know the public sector has made a real contribution to economic growth, but so has much of the rest of the private sector. The task of recovery would be easier if tax changes kick in sufficiently to promote more oil and gas exploitation, and if more action is taken to allow profitable but this time sustainable financial sector activty to make a bigger contribution as in the Labour years before 2007.