LONDON (MktNews) - Sushil Wadhwani, an external member of the Monetary Policy Committee, argued Tuesday that measurement problems and structural changes in the economy have led forecasters to overestimate inflationary pressure in the UK economy over recent years.
In a speech at the London Guildhall University, which largely mirrors a speech given in October last year, Wadhwani notes that from 1993-2000, GDP growth has turned out faster than expected, while forecasters have continually overestimated the rate of inflation.
Wadhwani rejects the notion that this is solely attributable to the strong exchange rate, arguing that other, new economy reasons, are probably more important. These include improved functioning of labour markets and increased productivity growth, particularly in the information, communications and technology sectors (ICT).
Moreover, Wadhwani argues that alternative assumptions about the measurement in computers and software could increase productivity growth by some 0.4 percentage points per annum. Such an alternative assumption could have lowered the equilibrium rate of unemployment in the Bank of England's economic model he argues, thus lowering estimates of inflationary pressure.
Looking ahead, Wadhwani notes that in the US, productivity growth is likely to decline in the months ahead.
"Nevertheless, with the US economy having decelerated significantly in recent months, it would be surprising if productivity growth did not decelerate for purely cyclical reasons," Wadhwani said.
However, he argues that even if this slowdown occurs, it does not necessarily imply that medium-term trend of productivity has not risen.
"If it did turn out that a deceleration in GDP growth and/or decline in share prices did lead to a pronounced decline in productivity growth, then there will be many who will proclaim that no sustainable increase in the growth rate of productivity had occurred in the US. Indeed, I have already noticed some commentators declare that the new economy hypothesis will be seen to have failed if productivity growth in the US falls to levels associated with past cyclical downturns. This is mistaken," Wadhwani said.
Wadhwani argues that it is perfectly possible that the new economy has increased the average growth rate of productivity, but also increased its cyclical variability.