The labour productivity of the UK economy as a whole, as measured by output per hour, shrank in the final quarter of 2015 for the first time in a year. On top of this, the fall was the largest in seven years.
The main driver was the manufacturing sector. Manufacturing productivity contracted sharply, largely on the back of weakness in the machinery and equipment, electrical equipment, and coke and refined petroleum sub-sectors. The productivity of manufacturers in these sub-sectors has been under pressure from the low crude oil price, which has reduced the demand of North Sea oil and gas companies for their products. Despite the weaker demand, manufacturers embedded in the oil and gas supply chain have held onto skilled staff – hurting productivity - as the oil price will inevitably recover.
Manufacturing productivity under pressure from oil and construction
The news on the UK’s productivity performance in the calendar year of 2015 was mixed. The productivity of the UK economy as a whole grew for the third year in a row and at the strongest pace since 2011 but still relatively weak at less than 1%. Services, in particular those excluding financial services, was the sole driver. In contrast, manufacturing was the lone drag. Manufacturing productivity shrank, and the fall was the largest in more than two decades.
The breakdown of the contributions to manufacturing productivity in 2015 indicates that, as for late last year, sub-sectors embedded in the oil and gas supply chain were a major drag. Also, the rubber, plastics and non-metallic minerals sub-sectors detracted from manufacturing productivity. Weak demand from the construction industry weighed on the productivity of these sub-sectors. Construction had a difficult year as factors including political uncertainty in the months leading up to the general election prompted major decisions about new building work to be postponed. The construction-related subsectors held onto staff, dragging on productivity, as such factors would inevitably be resolved.
No silver bullet in sight
There is no clear trigger for a major improvement in the UK’s productivity performance on the horizon. The UK’s productivity puzzle – involving productivity remaining weak despite strong economic growth – has still not been solved. The Office of Budget Responsibility recently became more pessimistic about the productivity outlook, revising down its forecasts in the Budget. Disappointing productivity growth in the UK and other major advanced economies of recent years was cited as the reason for the downgrade.
Yet there’s a good chance that the drag on UK productivity from manufacturing could ease somewhat. Manufacturers linked to the construction sector are likely benefit from the recovery of the construction sector currently underway. Also, there is anecdotal evidence from members in the oil and gas supply chain that they are diversifying their activities.
Solving the UK’s productivity puzzle is proving difficult but is essential for the economy’s long-term growth.