The UK's productivity puzzle

Deloitte-uk-monday-briefing

Slow productivity growth is one of the biggest topics shaping current economic discourse.

It is hard to overstate the importance of productivity in driving improvements in living standards. Since 1850, UK GDP per head has risen 20-fold, transforming our standards of living. If productivity had remained flat over that period, GDP per head would only have doubled.

UK labour productivity rose at around 2% a year from the seventies but has stagnated since the financial crisis. British productivity now remains only slightly higher than its pre-crisis peak at the end of 2007.

While weak productivity is a global phenomenon, international comparisons suggest that it is a particularly acute problem for the UK. For example, British workers are less productive than the French by a third. As a result, the average French worker could stop work on Thursday afternoon and still produce as much as the average British labourer does in a week.

Economists have provided several explanations to this productivity problem. Some argue that official data underestimate economic activity and with it potential productivity gains, largely due to problems with accurately measuring output in an information economy. Some suggest that the financial crisis has had a persistent scarring effect on output and productivity by halting corporate investment in technology. Others point out that regulatory forbearance and accommodative monetary policy have hindered the process of "creative destruction" by supporting low-productivity companies which would have otherwise failed.

Last month, the Bank of England's Chief Economist Andy Haldane added another explanation to this list. He made a compelling argument about the effect of widening divergence of productivity among firms on overall productivity growth.

His analysis of productivity across a representative panel of UK businesses shows that the corporate sector is characterised by a small minority of productivity leaders, firms that have maintained high and rising productivity both before and after the financial crisis, and a long tail of laggards - low productivity firms that have not been able to keep up with the leaders. Indeed, the data show that for more than half the firms on the panel, productivity is lower than the panel's average by at least 50%.

This divergence between firms at the frontier and the long tail of laggards has widened over the years. Arithmetically, it is this long tail that accounts for the flatlining of overall productivity since the financial crisis.

There are two aspects of this argument that are quite appealing.

Continue reading

Posted on 18/04/2017

UK corporate spirits revive

CFO Survey Q1 2017 Blog

The last Deloitte survey of UK Chief Financial Officers shows a further easing of the Brexit shock that hit corporate spirits last summer. The full report is available at:

http://deloi.tt/2enCLQa

CFO perceptions of external macro-economic and financial uncertainty have almost halved since last year’s EU referendum. Business optimism, which dropped to the lowest level in nine years last July, has risen to an 18-month high.

Continue reading

Posted on 03/04/2017

Hoping for a normal, not a New Normal, recovery

Monday Briefing growth
It is perhaps odd that despite gloomy news stories about the risks to growth the world economy is recovering. And this is a rare thing, a synchronised global recovery with activity strengthening in developed and emerging markets for the first time since 2010.

Leading indicators for growth are flashing green. Singaporean export growth, a barometer of global demand, has hit a two-year high. Chinese electricity consumption has rebounded.

Continue reading

Posted on 27/03/2017

Power to the workers

Monday Briefing City
The Governor of the Bank of England, Mark Carney, recently lamented Britain’s “first lost decade” since “Karl Marx was scribbling in the British Library” in the 1860s. He was referring to the fact that wage growth for the average British worker has stagnated in the decade since the financial crisis.

Last year earnings for the median worker in the UK, the person in the middle of the wage distribution, were almost 7% below their pre-recession level in real terms. The latest official forecast shows that real earnings are unlikely to return to pre-recession levels until 2021.

Continue reading

Posted on 20/03/2017

In praise of prosaic innovation

Monday Briefing small cogs
Societies become richer by producing more goods and services from a fixed amount of labour and other inputs. The history of human material progress is the history of ever greater efficiency in production.

Since the financial crisis that process seems to have broken down. Productivity growth has slowed and, for many, wages have stagnated. Across the Western world policymakers and politicians are searching for ways of raising productivity growth.

Continue reading

Posted on 13/03/2017

Of Blackberrys, pineapples and trade

Monday Briefing
Free trade helped power a dramatic rise in living standards in the West in the nineteenth and twentieth centuries. In the last three decades it has had a similar impact on the welfare of billions of people in emerging economies.

Yet in the face of a backlash against globalisation, free trade is arguably more at risk than at any time since the 1930s. Those who want to limit trade see it as a way of “bringing home” high-quality jobs and reinvigorating industry.

Continue reading

Posted on 06/03/2017

What voters think

Monday Briefing population circle
The polarisation of politics in the Western world has created new challenges to existing political norms. Declining support for established political parties has been paralleled by a growth of alternative, more extreme, parties and politicians. This week we take a look at what voters in the US, UK and Europe are telling pollsters on the big issues.

Mr Trump won a remarkable victory, but he entered office with an approval rating of 45%, a record low for an incoming US President. His rating now stands at 40% compared with an average of 61% for previous Presidents at this stage in their administration.

Continue reading

Posted on 27/02/2017

Africa’s demographic dividend

Monday Briefing Africa
History has often illustrated the power of the maxim, coined by the French socialist thinker, Auguste Comte, that “Demography is destiny”. The post war baby boom helped drive growth in Europe and North America through the 1950s and 1960s. In the 1970s Asia enjoyed similar, population-driven, gains.

History also shows that Comte’s dictum could, more accurately, but less elegantly, be rendered as, “Demography and policy are destiny”. To realize the potential of an expanding population a country needs to invest in education and infrastructure, and to have sound government.

Continue reading

Posted on 20/02/2017

Thoughts on living with uncertainty

MB Broadcast
Switch on the TV news, follow Twitter or read a paper and it can feel like we are living in an era of high, perhaps unprecedented, uncertainty.

We certainly seem, over time, to have become more aware of uncertainty. Since the 1940s references in English language books to uncertainty, volatility, complexity and ambiguity have soared. The term Chief Risk Officer did not exist before the mid-1990s. Now CROs are an established part of many large companies. In the 1990s the US army War College coined the term VUCA in to describe an apparently new world of volatility, uncertainty, complexity and ambiguity.

Continue reading

Posted on 13/02/2017

Brexit fears ease

MB Maze light
Last week two of the UK’s leading economic forecasters concluded that Brexit is unlikely to cause a sharp slowdown in UK growth over the next three years. This is big news.

Last summer, in the weeks after the referendum, talk of the UK falling into recession was rife. Economists slashed their UK growth forecasts. By August economists expected GDP growth would fall away in the second half of 2016 as Brexit hit home. They saw the UK eking out meagre growth of 0.6% in 2017, the slowest since the recession in 2009.

Continue reading

Posted on 06/02/2017

The surprising decline of inequality in the UK

Monday Briefing people
Inequality in incomes is a hot topic across the industrial world. Although the global recovery is in its eighth year in most rich countries the gap between higher and low incomes has widened.

A conspicuous exception is the UK. I was surprised to learn that take-home incomes for those in the bottom 20% of incomes have risen faster than for those in the top 20% in the last ten years.

Continue reading

Posted on 30/01/2017