Sector Friday - What's happening to productivity? | EEF

Sector Friday - What's happening to productivity?

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Much attention has been given to the UK's productivity performance (or lack thereof) since the end of the recession. The question is can productivity get back on track?

The chart below will be familiar to anyone with a passing interest - they show the difference between output per hour currently in the economy and manufacturing and what those levels might have looked like had the pre-recession trend growth not been interrupted by the financial crisis. It's a fairly depressing picture.    


A decade of gains for manufacturing

Before we pack up for a long lunch, manufacturing in the UK has had a fairly decent history in improving productivity levels.  In the decade leading up to the financial crisis growth in output per hour across the sector was running a bit ahead of most economies similar in structure to the UK.  Although we were lagging those that benefited the most from the ICT boom in the 2000s and the emerging regions of Asia and Eastern Europe, with Western European competitor we were making some progress in closing the gap.

Growth in output per hour in manufacturing 1997-2007
Source: Conference Board


Looking in more detail at the UK, gains were made in all sub-sectors of manufacturing, but clearly some managed to drive through bigger productivity gains than others. Increased automation (eg textiles), a focus on innovation (eg chemicals, inc pharma) and export intensity (eg mechanical) have had variable impact on manufacturing sectors.  

Growth in output per hour by sector 1997q1-2007q4
Source: National Statistics

Productivity was hit hard right across manufacturing, both in the downturn and in the subsequent stop-start recovery. Manufacturers did retain valuable skills employees though this period and continue to develop their future skills pipeline by recruiting apprentices. In addition, more flexible labour may also have been a substitute for investment in new machinery, particularly for credit constrained companies.

All sectors have had a role in the substantial gap between where productivity levels are now and where they might have been, but some are climbing back faster than others. There have been good gains in the fast growing aerospace and automotive sectors - both sectors that have seen increased investment in recent years. But sectors such as electronics and textiles are struggling to back on their pre-recession growth trajectory.

Growth in output per hour by sector 2009q4-2014q2
Source: National Statistics     


Getting back on track?

The question is can productivity get back on track. It undoubtedly a priority at the firm level - much of EEF's survey research points to the importance that companies place on driving up productivity levels (see Executive Survey and Investment Monitor for example).

And if politicians are looking for ways they can act to improve the UK's productivity performance they should look at how innovation and investment are incentivised in the UK and the long overdue implementation of a demand-led skills system. You can see more details on these in our Top 5 priorities for manufacturing


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