Academic journal article National Institute Economic Review

The New British Economy

Academic journal article National Institute Economic Review

The New British Economy

Article excerpt

Richard Kneller [*]

Garry Young [**]

The British economy has performed well since the recession of the early 1990s. How much of this is due to the revolution in information and communications technology (ICT)? We find that the stock of computing equipment has grown at a similar rate to that seen in the US, but there appears to have been no similar ICT-induced pick-up in productivity growth. We suggest that any underlying improvement in productivity growth has been obscured by a slowdown in manufacturing and by the need for the unemployed to be absorbed into employment. We find no evidence yet of any clear effect of ICT on pricing and suggest that any benefit of greater competition is likely to come about by encouraging productivity growth rather than by reducing margins. We argue that the main cause of Britain's improved performance lies in the labour market. Looking forward, we are optimistic that the benefits of ICT will become more apparent as the factors that have obscured it become less important.


Since the recession of the early 1990s, Britain has enjoyed a period of rare economic success. Economic growth has averaged about 3 per cent per annum and for the most part exceeded the rate of price inflation, which is now the lowest in Europe. Economic growth has been accompanied by a substantial rise in employment of over 2 million and it is now possible to talk of the economy being close to 'full employment'. Nor is this favourable economic performance expected to change markedly over the near future, even though the recent volatility in equity prices, the foot-and-mouth crisis and the slowdown in the US economy are expected to reduce the rate of GDP growth this year.

The ability of the British economy to generate reasonably strong growth in output and employment over a lengthy period without causing inflation has been a surprise to many. The apparent improvement in the relationship between changes in economic activity and inflation is one of the factors that has encouraged some people to believe that the economy is behaving differently from the way it did in the past. Until recently this view has been supported by the experience of the US, where even stronger growth has not yet led to a pick-up in inflation.

In the second half of the 1990s, an improvement in the inflation-activity relationship has been accompanied by a sharp surge in private non-residential capital spending both in Britain and the US (chart 1). For both households and firms, a substantial part of the increase in capital spending has been in new information and communications technology (ICT). Not only is the equipment new, but it has been applied to new areas such as the internet. The coincidence of an improvement in overall economic behaviour with the prevalence of ICT has led to the suggestion that technological innovations in ICT have caused the economy to function better.

Although the slowdown in the US economy and the collapse of new-economy share prices has tempered the level of enthusiasm for this new view of the economy, it is, however, also true that the economic behaviour of British households and firms has changed in other respects over the last few years. Magazines and newspapers are full of examples; shopping has become many people's favourite leisure activity and in terms of the labour market the 'working week' means different things to different people. This has been associated with a proliferation of products, which has widened consumer choice confusingly, and the development of an 'open all hours' culture.

The primary purpose of this paper is to assess whether there has been or is about to be a fundamental change in the British economy as a result of investment in and application of new ICT technology. Throughout, we concentrate on conventional measures of economic activity and ignore other possible aspects of the new economy. It is clear that mobile phones and the internet are important tools for those trying to keep track of events in parts of this new economy, but it is doubtful whether they have caused it. …

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