Why has productivity been so disappointing?
Tony Ward is chief executive of Clayton Euro Risk
So we start 2017 with the economy looking healthy. Latest figures from Markit/CIPS services purchasing managers’ index (PMI) suggest the UK services sector grew at its fastest pace for 17 months in December, rising to 56.2, up from 55.2 in November – its highest level since July 2015.
Earlier in the week, surveys in the construction and manufacturing sectors indicated a similar pattern of growth. Furthermore, official figures this week are expected to show manufacturing production picked up by 0.8% in November, following a dip the previous month. Economists now forecast growth of 0.5% in the fourth quarter, with as yet little sign of a slowdown induced by the Brexit vote.
Notwithstanding these strong figures, and as I stated in my blog last week, things look like they may be set to change with ‘great tests’ lying ahead. Rising inflation and sluggish wage growth are expected to slow customer spending this year for sure, but it’s the UK’s sluggish growth in productivity, and its impact on the economy, about which I’m really concerned.
It was reported this week that hourly output in the three months to end-September was only 0.4% higher than the previous year. Although there was growth in the first nine months of 2016 between 0.4–0.5% a quarter, economists warned that the figures were disappointing. Richard Hey at ONS noted that despite improvements productivity was ‘still weak compared to that experienced in recent past’.
Part of the reason for low productivity lies in Britain’s regions. Londoners are by far the country’s most productive workers, with rates a third above the UK average in 2015. By contrast, levels of productivity in Wales and Northern Ireland were 20% lower than the national average.
Andy Haldane, the Bank of England’s chief economist, said that productivity at more than three-quarters of British companies was stagnant and cited long-standing concerns about low public infrastructure investment. That’s a worry. And the ONS said that productivity stood at 15.5% below where it would have been if it had returned to its pre-crisis trend.
As we enter an uncertain year, with Brexit negotiations about to begin, improving productivity rates would seem to be crucial. Howard Archer, IHS Global Insight, agrees suggesting that Britain had ‘a lot of catching up to do on the productivity front’. So why has productivity been so disappointing? Mr Archer explains it thus: “Part of the UK’s recent poor labour productivity performance has been due to the fact that employment held up well during the downturn and then picked up markedly.” He added: “Low wage growth increased the attractiveness of employment for companies. This meant that it was easier for companies to hold on to workers even when they did not really need them in order to retain their experience and knowledge. A major risk now is that prolonged uncertainty and concerns over the UK’s economic outlook ends up weighing down markedly on business investment and damages productivity. This could be compounded if foreign companies reduce their investment in the UK and this dilutes any beneficial spill-over of skills and knowledge.”
Well, yes. So the outcome of our negotiations with the EU could certainly help or hamper productivity. It is currently hanging in the balance. One thing is certain: we cannot afford to impede future business investment.
Mariano Mamertino, a Europe economist at jobs website Indeed.com, said: “Such disappointing levels of productivity growth belie the economy’s apparent robustness and pose a serious threat to wage growth prospects. Productivity is the ultimate driver of both wages and living standards, so with inflation set to creep up steadily this year, increasing numbers of workers risk seeing their wages fall in real terms.”
While Britain’s economy has grown strongly since June’s vote to leave the EU, most economists think that future restrictions on migration and the probable increase in bureaucracy involved in trading with Europe will harm productivity growth.
These are warning bells. So let’s be mindful of this in our negotiations. Productivity improvements are an important source of economic growth and prosperity. An upturn in productivity remains key to our future success.
