What’s gone wrong with UK productivity

Monday Briefing
One of the biggest headaches for Britain's new government is raising productivity. Productivity, or the efficiency of production, is the main driver of human welfare. Raising it is the Holy Grail of economic policy. As Paul Krugman, the economist and Nobel laureate put it, "Productivity isn't everything but in the long run it is almost everything".

UK's productivity performance since the Financial Crisis has been dismal. Unlike previous downturns there has been no bounce in productivity since the recession. Among the major industrialised nations only Italy has done worse than the UK in raising productivity since 2007.

If the UK's pre-2007 trend had continued, productivity today would be more than 16% higher. Wages and the standard of living would be significantly higher than today.

The gap looks even worse measured in terms of absolute levels of productivity. Output per hour in the UK is 25% lower than in Germany, the US and France.

Something seems to have gone badly wrong. As with so many other economic issues, there is no agreement on what. But there are plenty of theories. 

The most comforting is that the UK's productivity crisis is a statistical illusion. Productivity is calculated by divided output by hours worked. If output is underestimated so is productivity. GDP numbers are prone to revision, often years after the event. If GDP gets revised up – and it often does – the UK's productivity performance will improve. Another angle on this theme is that technology is raising welfare in ways that are not being picked up in conventional measures of economic activity – so, for instance, people getting free music and videos via You Tube or using Google Maps. It may be that mismeasurement is part of the story, but I doubt it explains much of the productivity gap.

The gloomiest explanation for weak productivity is that today's technologies are doing less to enhance efficiency than those of the past. Its proponents argue that we have banked the big inventions – everything from antibiotics, the internal combustion engine and electricity – and we are in an era of less revolutionary technological advance.

The most influential advocate of this view is the US economist, Robert Gordon. Gordon invites us to choose between one of today's ubiquitous technologies – the iPhone – and one of the nineteenth century's great inventions, the flushing toilet. His point is that today's innovations are not changing lives in the profound way that the technologies of the nineteenth and twentieth century did.

But this doesn't work as an explanation for the UK's recent performance. Why would UK productivity have stood still when other countries have seen gains? And why, suddenly, in 2007, would technology cease driving productivity after years of good growth?

A more plausible theory is that the shrinkage and disruption in the financial sector has taken a chunk out of UK productivity growth. Tougher regulation and an end to the pre-crisis financial boom which artificially raised financial sector productivity have taken a toll. The Economist magazine estimates that productivity in finance and insurance is 10% lower than in 2009.

There are two other suspects.

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Posted on 26/09/2016

A short history of globalisation

Monday Briefing Global
Globalisation has been a conspicuous casualty of the global financial crisis and its aftermath. In recent years the two engines of globalisation, growth in international trade and capital flows, have lost momentum. In the West globalisation is routinely blamed for job insecurity, inequality, low incomes and over mighty multinationals. Politicians of left and right increasingly represent trade as a threat.

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Posted on 19/09/2016

The case for progress

Monday Briefing planet city
Is the world getting worse? 71% of Britons polled by You Gov last year thought so. Only 5% thought it is improving. News headlines tend to confirm the impression of a world that is riven with conflict, poverty and danger. Most Britons and Americans think world poverty is rising; in fact it has halved in the last 20 years. When we think about the risks of flying we tend to think of recent air crashes. Few of us know that since the 1970s the number of passengers has risen ten fold and the number of accidents and fatalities has halved.

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Posted on 12/09/2016

What happened over the summer?

MB Mag
Economic news tends to attract less media coverage and less public interest over the summer. Understandably, journalists, and their audiences, have holidays on their minds. Yet economics is no respecter of seasons and data and events have continued to pile up.

With the summer holidays drawing to an end here's our two-minute take on what happened in July and August.

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Posted on 05/09/2016

Who’s having a long holiday?

Holiday Monday Briefing
With the holiday season in full swing London is always quieter at this time of year. Certainly not as quiet as Paris, where, famously les grande vacances mean that much of the country takes August off, but still quieter than usual.

As the summer holidays approach their end, this week's Monday Briefing examines the winners and losers in terms of holidays and working time.

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Posted on 31/08/2016

The attractions and perils of negative interest rates

MB Safe
The global financial crisis has brought in an era of low interest rates. Eight years on from the onset of the crisis growth remains subpar and interest rates have drifted lower still, sometimes into negative territory.

In their search for new ways of boosting growth some central banks have set interest rates below zero. The European Central Bank (ECB) became the world's first central bank to do so in 2014. Denmark, Sweden, Switzerland and Japan have followed the ECB and introduced negative rates.

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Posted on 22/08/2016

Emerging markets bounce

Monday Briefing oil
Sentiment about emerging markets is prone to big swings. From the late 1990s optimism, bordering on euphoria, was the order of the day. That bubble burst more than five years ago.  Since then, but with some conspicuous exceptions, sentiment about emerging markets has become increasingly negative.

China's long-term slowdown, widespread political turmoil, falling commodity prices, and the withdrawal of capital by foreign investors have all played a role. Emerging market equities have taken a hammering and growth has softened.

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Posted on 15/08/2016

Some good news

Deloitte-uk-monday-briefing-colour (2)

Gross Domestic Product (GDP) is the broadest and most ubiquitous measure of economic performance. But as a gauge of human welfare it is wanting. Many factors which contribute to welfare fall entirely or partially outside GDP.

Worse still, many things which contribute to unhappiness - such as crime, pollution or poor health - can raise GDP, at least in the short term.

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Posted on 08/08/2016

Italy's banking problems

Deloitte-uk-monday-briefing-Rome
So far the economic effects of Britain's Brexit vote have been pretty localised. The pound and business confidence have plummeted and economists have slashed their forecasts for UK growth next year.  But there are few signs of contagion from the UK to the rest of the world. The indicators of financial stress which were flashing red in 2008-09 following Lehman's failure, or in 2010-11 at the time of the euro crisis, are at low levels. Brexit is a huge political shock, but it is not a global economic shock.

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Posted on 01/08/2016

What to read on holiday this summer

Deloitte-uk-monday-briefing-books
The summer break provides a welcome escape from Brexit and an opportunity to spend some time catching up on reading. Our summer reading list provides six readable, thought-provoking articles to ponder on the beach or by the pool. All are available free and online.

You can save these articles on your iPad's reading list by opening the links on Safari and tapping on the share arrow next to the address bar. To print these articles please use the print icons, where available, on the webpages to ensure the whole article comes out.

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Posted on 25/07/2016

Brexit hits business confidence

Deloitte-uk-dashboard-monday-briefing
I hope you might be able to join me later today for a webinar in which I will examine the results of our latest CFO Survey and prospects for the UK outside the European Union. The webinar takes place today, Monday 18th July, at 1500 BST. To join, please logon to:

http://deloi.tt/29DVbsj 

If you cannot make it today the webinar will be available on a listen again basis via the same link.

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Posted on 18/07/2016