As one illustration, Chart 2 plots successive forecasts by the Bank of England of UK productivity growth since 2008, while Chart 3 shows IMF forecasts of productivity across advanced economies over the same period. These charts point to a string of material and serially-correlated forecast errors over recent years. Productivity growth has consistently underperformed relative to expectations, since at least the global financial crisis. This tale of productivity disappointment, in forecasting and in performance, has been extensively debated and analysed over recent years. Some have called it the “productivity puzzle”. 1  With each year that passes, and as each new turning point in productivity has failed to materialise, this mystery has deepened. This has led some to conjecture that the world may have entered a new epoch of 2  sub-par productivity growth, an era of secular stagnation. Various possible causes of this stagnation have 3  been posited, including adverse demographic trends and diminished rates of innovation. The secular stagnation hypothesis is striking in its gloomy implications for future growth in living standards. 1 2 3  For example, Barnett et al (2014), Bryson et al (2014) and Weale (2014) For example, Gordon (2014) and Summers (2013). Gordon (2014). 2  All speeches are available online at www.bankofengland.co.uk/speeches  2  It is striking, too, because of the starkness with which it contrasts with a second topical hypothesis. This posits that we may be on the cusp of a Second Machine Age or Fourth Industrial Revolution, an era of 4  secular innovation.

Sound macroeconomic policies, institutional improvements spurred by EU-accession, increased trade and financial integration with the EU contributed to a rapid catching-up. Indeed, the year 2006 was the year with the highest GDP growth for the region since the beginning of transition. Today, the New Member States face the challenge of maintaining stability and sustainability of the catching-up path. Stability requires macroeconomic policies avoiding the accumulation of imbalances. Sustainability implies that past rates of high economic growth could be maintained in the future. To some extent, economic performance in the past decade could partly be related to a cyclical recovery after an initial slump. The recent dynamics were also generated by the massive reorganisation and privatisation of the economy after the fall of  4  BIS Review 115/2007  communism. This process triggered large FDI inflows providing both financial means and technological transfer. Today privatisation is almost complete and one has to look for new engines pushing forward the catching-up process. Currently, I see three main risks that have to be addressed as priorities by policy-makers: (i) (ii) (iii)  increased financial vulnerabilities, in relation with fast credit growth and mounting external imbalances ; rising inflation pressures which hurt external competitiveness; and the challenge of ensuring high future potential growth. . This third challenge belongs to the long-run as future economic developments will need to feed productivity growth beyond the dynamics of catching-up, through technological and production process innovation.