UK potential growth falls to 1.3 percent amid productivity slump
Bank of England Governor Andrew Bailey warned that UK potential annual growth has fallen to 1.3 percent since the financial crisis. Speaking at the Mansion House dinner on July 14, Bailey urged policymakers to shift from debate over regulatory volume to designing rules that actively spur innovation.
Fifteen years of supply shocks
UK potential supply growth averaged 2.8 percent annually in the fifteen years before the 2008 financial crisis, with productivity contributing 2.4 percentage points.
Over the subsequent fifteen years, potential growth dropped to 1.3 percent, as productivity contribution fell to 0.4 percentage points.
Annual growth in national income per head slowed from 2.0 percent to 0.6 percent.
Bailey noted that successive supply shocks, including COVID-19, the war in Ukraine, and Brexit, compounded these long-term headwinds.
Meanwhile, the return of inflation to the 2.0 percent target faces delays due to Middle East conflict energy price shocks.
Capital, payments and machine intelligence
Addressing growth requires rethinking regulatory design rather than arguing over rule volume.
UK bank returns reached 15.4 percent in early 2026, exceeding equity capital costs and enabling expanded lending capacity.
In payments, the central bank is advancing tokenised bank deposits, launching a Digital Securities Sandbox for digital gilts, and consulting on systemic stablecoins.
Meanwhile, artificial intelligence promises general-purpose productivity gains, though Bailey warned that safe adoption requires proactive rules covering energy allocation and legal liability.
Diagnosing growth without easy fixes
Bailey rightly identifies that regulatory tweaks cannot replace broader supply-side reforms.
Relying on artificial intelligence to solve structural productivity problems remains overly optimistic given infrastructure gaps.
Central bank initiatives alone cannot reverse a fifteen-year economic slowdown.
Source: Andrew Bailey: Growth and regulation
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