2019 was a difficult year for UK productivity as negative results in the first half of the year were succeeded by two very slow, if marginally positive, quarters1. In light of the economic disruption resulting from the coronavirus pandemic, it’s hard to see 2020 as any kind of real turning point, despite the significant fiscal stimulus packages announced in March2.
Unfortunately, the past year was not an anomaly, rather it holds the course for the preceding decade during which time UK productivity grew by an average of 0.22% per year (Q4 ‘07 - Q4 ‘19). These figures are well below the historical norm. In the prior three decades productivity grew by an average of 2.3% per year3. This productivity slump has wide-reaching consequences for the UK economy and its workers.
Looking at the dates, 2008 can be considered the point of detonation, while the fallout continues to smoulder 10 years on. Explaining this phenomenon has preoccupied economists, politicians and business leaders for the duration of the period.
On the one hand, the Financial Services industry accounts for some of the decline as institutions handled less cash with the same number of staff and the same fixed costs4. Yet, the phenomenon also spread to other areas of the economy, namely the manufacturing sector which experienced a 3.5 percentage point decline in average annual productivity growth from ‘09 to ‘15 (+4.3% per year down to +0.8% per year)5.
Most commentators explain the drop in manufacturing productivity by highlighting the growth in low-cost, low-skilled labour to the detriment of capital investments in equipment and digital innovation. The upside is a record rate of employment, however, the downside is a decade of lost productivity growth despite significant advances in technology and digitisation6.
The shift from innovation to labour intensity as the basis of the UK economy is often explained as a consequence of lost confidence and general uncertainty, exacerbated in recent times by geo-political tensions, disruption to global supply chains and, of course, Brexit7. However, an issue of such complexity should not be diagnosed in these general terms; a view from 35,000 feet helps describe the lay of the land, however, it fails to understand what’s happening on the ground.
To turn the discussion in a different direction, UEP has partnered with Roland Berger in search of a new approach to the productivity puzzle. To begin, we aim to understand the specific challenges facing employers and workers in individual organisations, whether that’s access to skilled labour, adoption of tech and automation, investment in R&D or improved adoption of operational excellence and Lean methodologies across manufacturers and their supply chains.
To improve productivity and recover will take a concerted effort to design and execute innovative, practical solutions and thrust the UK economy into a new productivity boom.
- Harari, D (2020), ‘Productivity: Key Economic Indicators’
- Budget 2020
- Tenreyro, S. (2018), ‘The fall in productivity growth: causes and implications, Bank of England speeches’, p.3
- FS productivity declined by 2.1% per year between 2009-2015. Tenreyro, S. (2018), ‘The fall in productivity growth: causes and implications, Bank of England speeches’, p.15
- Tenreyro, S. (2018), ‘The fall in productivity growth: causes and implications, Bank of England speeches’, p.12
- For UK employment rate by sector see, ONS (2020), ‘EMP13: Employment by industry’
- See Ramsden, D. (2018), ‘The UK’s productivity growth challenge, Bank of England speeches’, pp.3-4