Are economic fundamentals strong?

The Chancellor's article in The Times on Wednesday has attracted criticism from Brexiteers, some of whom have argued that he should be sacked (his remarks before the Commons Treasury committee seem to have caused particular offence). I am more interested in his claim that 'the fundamentals of economy are strong'.

We have now had a decade of weak productivity growth which constrains possibilities for increases in real wages. Initially, this could be blamed on labour hoarding after the GFC or impairments in the banking system, but these arguments no longer apply. Indeed, the Office for Budget Responsibility is likely to cut its predictions for productivity growth, posing challenges for the Chancellor's budget judgment: Forecast Evaluation Report

Even economists cannot agree about why productivity performance is so poor. One explanation has been weak business investment since the GFC. Low interest rates have meant that there has been a limited 'shake out' effect of weaker companies, so one does not see the kind of 'batting average' effect on productivity one saw during the Thatcher years.

It may also be the case that it can be more challenging to secure productivity gains in a service oriented economy, although I appreciate that that is a more contentious claim.

It could also be argued that downward pressure on wages and an emphasis on labour flexibility has reinforced low productivity ways of working and attracted relatively unskilled migrant workers. However, it may not be possible to substitute capital for labour in many of the activities they undertake. What is clear is that the answer to the productivity problem is not to be found in further tinkering with the labour market.

If one wants further evidence, the IMF has singled out the UK as a 'notable exception' to an improving global economic outlook, arguing that the negative effects of Brexit are beginning to show. In its twice yearly Economic Outlook, the IMF reduced its UK long-term growth outlook from 1.9 per cent to 1.7 per cent (the long-term trend is in the region of two per cent).