The downgraded productivity figures revealed in this week’s budget statement made for stark reading.
A decade of struggle in the wake of the financial crisis is metastasising into a settled trend, with the long-anticipated return to pre-crash productivity levels looking increasingly like wishful thinking. And while the productivity problem is one that has puzzled many countries since 2007, the UK’s predicament is worse than any other G7 nation. Just yesterday it was revealed that France has overtaken the UK as the world’s fifth-biggest economy. By virtually all measures – with unemployment being the one glaring exception – the country is going backwards.
Ultimately, of course, lower productivity means lower living standards. Combined with lower growth, higher inflation, a fall in real-terms wages and consumer debt approaching record levels, you have the makings of a perfect economic storm on the horizon. Using the downgraded numbers for growth and productivity, the Institute of Fiscal Studies predicted yesterday that by 2021, average earnings will still be below their 2008 levels, adjusted for inflation. The gloomy outlook is filtering down to households too, with consumer confidence at its lowest level since the immediate aftermath of the Brexit vote.
In recognition of the approaching dark clouds, Philip Hammond’s budget was a marked departure from recent editions, with £90bn of extra borrowing over the next five years announced. The pillars of austerity remain, but there was undoubtedly an easing of sorts. Extra money was found for the NHS, the delivery of Universal Credit and the preparations for Brexit. But in terms of big-ticket announcements to provide hope in the face of the productivity crisis, we were left surprisingly short.
Half a billion was announced for 5G, fibre broadband and artificial intelligence research. Not to be sniffed at, by any means, but against the backdrop of the DUP receiving double that for propping up the government, it starts to look a little anaemic. Likewise, the £540m allocated to electric cars and charging networks. Given the recently announced plans to phase out petrol and diesel sales from 2040, a lot more will be required to kick the EV revolution into gear, and the infrastructure will not appear overnight.
Earlier in the week an extra £2.3bn R&D spending was announced, but will not materialise until the last year of this parliament. The £7bn boost to the UK’s national productivity investment fund won’t be seen until a year later, in 2022-2023. On the positive side, £1.7bn has been set aside for a city region transport fund, with around half going to areas with elected metro mayors such as Greater Manchester and Tees Valley. And while Hammond is to be commended to some degree for these measures, economists have said they fall well short of the level of investment needed to address the productivity disaster that is emerging.
Infrastructure would seem an obvious place to go on the offensive. Marquee projects like Swansea Bay Tidal Lagoon – which received broad approval in the independent report from former energy minister Charles Hendry – has been held up for what seems like an age. Issues over strike price are understandable, but Swansea will be a pathfinder project and could provide a blueprint for an entirely new energy sector, and expertise that could be exported around the globe. At £1.3bn it looks a bargain, especially in light of some of the other figures we’ve been confronted with this week.
Transport links in the north have long been neglected, and large-scale investment here could boost the region, helping close the vast productivity gap that has opened between parts of the UK. Not to mention the jobs that would be created and the skills that would be developed. Ultimately, we need investment in technology, as well as the people that can make it work. Despite what some publications would have us believe, the elevation of companies such as Just Eat (of which I am a customer and a fan) at the expense of one like Babcock is not something to be cheered, and will do absolutely nothing to solve the deep-seated issues the UK is currently facing. Project Fear is fast becoming Project Reality, and the current government looks dangerously short on answers.
However in France the productivity means there is 9.7% unemployment rate against 4.7% in UK, and in France they reduced to 35 hours per week. Because the productivity is high up. Is it better to produce too fast and have more unemployment or is it better to adjust the pace, but although lower pay, people are occupied or can train younger generations?
There are a number of factors in France which drive employers towards automation, such as the virtual impossibility of firing employees once hired. This translates into buying automation rather than employing people. Further, the employment costs of employees in terms of fixed commitments amounts to about 40% of wages paid i.e. a further dis-incentive to employ people.
Can’t say I’m particularly worried, to be honest. I am generally very skeptical about economic forecasts, partly because I don’t have much confidence in the integrity or competence of the people making them, but mostly because it’s just a very difficult thing to get right. I mean, just look at all those incorrect forecasts in the figure above, they just kept getting it wrong.
The shock from the 2008 crash has been so profound that it is actually causing the profile of the UK economy to shift away from finance. The reorientation towards new technologies and the recognition of the importance of R&D is very encouraging, so I view it as a blessing in disguise.
You’re right, forecasts have been consistently off the mark. They have consistently overestimated the recovery in productivity levels. It appears the reality of the situation has caused a readjustment downwards.
That’s an interesting perspective. Hope Manufacturing, R&D and generally Creativity becomes the backbone of the UK economy. It would be refreshing to have the UK back at the top.
AW: At £1.3bn it looks a bargain :: policyexchange.org.uk: £1.3B already >40% over earlier estimates forecasting £168/MWh & that 4x wholesale price (jan17)! AW: independent report from former energy minister Charles Hendry :: en.wikipedia.org Hendry adviser for Atlantic Supergrid to import power from Iceland. He signed pact while MinState :: theguardian.com Former Tory minister takes job with party donor # say no more except careless commentary can compromise editorial integrity & especially so when censored!
Price over the project’s lifetime is projected to be £96.50/MWh, with the Cardiff scheme dropping to £70.40/MWh. Like I said, it’s a pathfinder project.
Also, if Hendry was compromised by his links to Atlantic Supergrid, shouldn’t he be discouraging UK generation?
Productivity gurus: heal thy-selves! Parliament must be the least productive place on earth: the courts world-wide likewise, (six years to bring an obvious war-criminal to his come-upperance), the time to create proper accounts of firms, NGOs, international companies to account?! around the world measured in year, not hours!
Will we really need to worry about productivity; once we leave the EU nobody in Europe will buy from us. That cuts out a big share of our markets and most developing countries have labour rates much lower than ours, so they will get the business. We will have to share the reduced work around workforce to fill the time available, therefore becoming less and less productive!
Do you really think that people in the EU buy from the UK just because we are a member?
If I want early vegetables I have to buy Spanish, not because they are also in the EU but because their Spring starts before ours! If I want (heaven forbid) a BMW, then I have to buy it from Germany, again not because they are in the EU. The list can go on and it works both ways.
This whole scenario demonstrates the fact that a lot of industry and commerce preferred, with government sanction, to recruit cheap labour in the post war period rather than modernise and invest capital in plant and machinery. It took forever to modernise and re-equip basic infrastructure (rail was and remains the classic example). Obsolescent technologies were retained well beyond their expiry date. The steel, shipbuilding and other heavy industries just were not competitive on delivered price. The competitive playing field was not level (it rarely is) but the UK just lost its sense of direction.
The uproar about productivity should focus on the massive levels of incompetence and ineptitude that characterises so much of national, regional, county and local government and most agencies of the state. Some serious stable clearing needs to be undertaken. Our benighted politicians just don’t see the problem or are prepared to address it head on and drive through the necessary reforms. I suspect al the hand wringing on this issue will soon disappear despite the rantings of the practitioners of the gloomy science.
You forgot to mention the easy export, no customs, that encouraged would be exporters to treat the Continent as a home market, so it is not to be any longer. So what.
As noted by M.A.A. above, OBR forecasts have been consistently low for years – giving Chancellors occasional windfalls.
Productivity is becoming a less clear economic metric as we move rapidly from a manufacturing to a services based economy: unfortunately, low wages are a prime feature of services. Employment in UK manufacturing fell from 3.6m to 2.9m between 2006 and 2016, value about £ 11.3b – mostly in regions north of London of course.
The other creeping killer is energy costs, According to the OBR data, the Climate Change Act is leading to ever increasing electricity costs (£ 5.7b in 2016 rising to £ 8.6b in 2017 and continuing to increase annually. The Government have at last realised that subsidies are crippling the power sector, but the damage has been done: hopefully economically-foolish ventures like Swansea Bay are now dead.
The fall in productivity could be explained by the fall in the use of direct communication. Emails consume more and more useful time, and we now expect to reserve half a day to try to telephone the tax man, the local council or the service provider. On top of that it is now possible to do all your home admin, social media catchup, and the weekly shop whilst at work. I am not too surprised that industrial output is not going up as it should.
Yes Jack, it’s all the fault of those evil climate folk and their endeavours to save the planet from destruction. Also, it should be noted that Germany, with higher industrial electricity costs than the UK, is flying. Go figure.
Germany did not close down its manufacturing: however the Energiewende is causing serious problems to their cost base.
I am a climate change sceptic because I’ve seen nothing that on proper examination proves any form of climate change beyond what nature does. Polar bears are increasing rapidly!
Sorry to drag this out Andrew, but consensus is not scientific evidence, also I suggest that you dig a little deeper into the dishonest “facts” provided by NASA, not one of them stands examination: repetition of untruths does not make them facts.
There were two links there Jack. One re: consensus, the other re: the evidence that consensus is based on. If you dispute the evidence/consensus of Nasa (not to mention virtually every other scientific body on the planet), perhaps you could do us the honour of laying out the facts upon which that dispute is based.
Most SME manufacturers and sub-contractors are highly productive as are most of the motor industry manufacturers.
Much of the service industry is extremely unproductive (how many waiters does it take to serve you with inedible food) as are most public sector operations and most of the ex-nationalised concerns.
As in Germany, one way to start to remedy productivity would be to ban mobile phones from the workplace for other than business use and ban the use of equipment for the use of social media and personal communications.
The Government could also fund productivity centres to use existing expertise to encourage the use of well established techniques to improve productivity although over-coming “can’t do” attitudes and ingrained practices would take some real effort.
My ex company took all the sales from a German engineering company -What did they do -Well they started again -New building new machines new design -and a workforce that started their working practices from scratch -We took all their business .Yes it was hard to change -most of the change for better and more productive output was about ourselves as the attitude had to change from okay to perfect in less time -The machines and systems only help ,but you need all things in place to get higher production and profit -above all of this is knowing when to change as you cannot keep selling petrol or Diesel in a reducing market and still hope that it will always win out .If there was one time in the past that we as a nation had things right, it was when the BBC computer etc. was freely available to schools as it was these moments that we were ahead .I hope that someone sees this innovation in the 3-D printing world of tomorrow and supplies every school with them in abundance .
I agree with Colin that (if I have understood) that a ‘start again’ approach to increasing productivity and hence gaining market share (or creating new markets) is needed. Too often UK industry is all about ‘sweating’ existing often clapped out assets which can absorb resources – people and physical – rather than investing in newer machinery and processes (of course with the proper analysis of what is required) to really increase productivity by a step change.
Old machines can be re-purposed quite usefully but many machines seem to be almost linear descendant of the original prototype (without a proper review and re-consideration).
I think there are a lot of true words and good points (though the divergence into a discussion of climate change seems a bit too far off topic).
As in software engineering there is “no silver bullet” Robots might very useful – but not for everything and cheap labour and outsourcing have been illusions that have ensorcelled politicians & managers alike – being a substitute for actually thinking things through (or quite often thinking) and a belief that pouring money on something will make it all work.
This sort of thinking meant an unholy worship of service industries.
High wages can be a result of high productivity – but that truly requires investment of thought and wise use of funds.
As a country we seem to have neglected tools for productivity – including investment in proper infrastructure (as opposed to that dedicated to keeping up house prices in London) and in designing and making tools for productivity (including not just manufacturing equipment but also education and systems/networks for collaboration that are relevant and accessible by the users).
This is a different systems analysis slant on things. And hope it will help in qualifying tools for productivity by addressing consideration of their limits.
Sorry about the climate change bit, I feel very worried about the UK’s high electricity costs and increasing dependence upon imported gas as part of the long term disaster that the once stable UK electricity supply industry has become.
Looking at investment, how do you think that we are ever going to get investment in risky manufacturing projects when the return on property speculation and zero-hours based services is far more profitable?
http://ec.europa.eu/environment/enveco/jobs/pdf/Study%20Resource%20labour%20productivity%20.pdf which also gives definitions or Resource productivity (and efficiency which is different).
Also that report makes the point that high resource productivity ie the use of say less water to grow crops ‘can’ (ie possibly) decrease labour productivity. I am not saying this is the whole story – but it is surely one which needs to be considered by those who seem to have just spotted the woefully low level of UK labour productivity.
There is also a related issue of energy efficiency in say extracting resources. The more efficient the extraction (in terms of energy used to extract a ton) the more likely uses can be found for the resource, so increasing the overall amount used. This was noted by William Stanley Jevons around 1885 https://en.wikipedia.org/wiki/Jevons_paradox on his study around coal . Apparently it is a key paradox in environmental economics.
In addition the increasing number of individual self employed people is having a huge impact on the productivity rates in the UK.
I am a proponent of ever increasing labour productivity due to the beneficial increase in living standards as the article points out. But there is an argument to be had for the benefits of resource efficiency vs labour productivity which it would be good for The Engineer to facilitate.
Hear Hear: the sooner we employ politicians who have an understanding of industry and the principles of adding value then the sooner our country will emerge from the current malaise.
The most convincing argument for our relatively low productivity that I have seen is the idea that much of our management and planning is short term in its thinking. This leads to chasing EDITDA growth for the next quarter by business leaders.
Inevitably this results in sweating the capital resources and staffing up rather than leaders taking a longer term and more holistic view of the businesses that they run. The stock market compounds this problem by its skewed and obsessive focus on earnings growth.
Instead of a fixation with short-term revenue growth the German Mittelstand by contrast is thinking about what it is leaving for the next generation.