Productivity At Heart Of UK Growth Concerns

Rarely has the world, or for that matter the UK economy, been as exciting (terrifying might be a better word) as it has been for the past few years.

Perhaps we should be relieved, then, that the Bank of England is now doing whatever it can to make it seem far less exciting and far more boring than that.

The latest Inflation Report was a prime example: Britain's economy is recovering from the crisis, but is still deeply vulnerable to any matter of factors - the rising pound, the ballooning current account deficit, the Greek crisis, the domestic housing crisis, the sharp falls in international bond markets.

However, the Bank's attitude to monetary policy - for which, read interest rates - remains steady as she goes.

The Bank notched down its growth forecast for the UK economy but didn't drop any major hints that it would be lifting interest rates sooner than next spring (which is when investors currently expect it).

It said even an intensification of the Greek crisis would have little impact on UK growth.

In a letter to the Chancellor to explain why inflation had dropped so far below target (it is currently 0%, compared to the Bank's 2% target), the Governor said CPI inflation could drop into negative territory, but would soon rise back towards target. Nothing to see there.

None of this is to say there weren't some interesting features to the Inflation Report.

Perhaps the most striking was how many times the Governor warned that the Bank had cut its expectations for productivity growth.

This is a major issue for the UK economy - after all, productivity is simply a measure of how good the economy is at generating growth (for every hour workers put in).

The fact that it is disappointing implies the country will struggle to generate meaningful growth and meaningful income increases for some time.

He added that this is something the Bank cannot fight on its own. Instead it means deeper reforms from the new Government.

Then there's the fact that the Government is planning big cuts in the coming years.

Finally there's the fact that the financial system remains unreconstructed in many places and that could pose a risk in the future.

During the news conference on Wednesday, I asked the Governor to list the challenges facing the UK economy in the coming five years.

He put them as follows: 1: Fiscal (eg government cuts, deficits etc); 2: Productivity; 3: The financial system.

All big issues George Osborne will be confronted with in the coming years.