Today the ONS published its flash estimate for labour productivity for the three-month period between July and September. Although the pickup in productivity growth this quarter is good news, more is yet to be done to significantly improve the UK’s productivity performance. The Autumn Budget is an opportunity not to be missed.
1) Productivity growth picked up in 2017q3…
Labour productivity returned to growth in the three months between July and September after two quarters of contraction, according to the ONS. Output per hour increased by 0.9% over the previous quarter – its fastest expansion in six years, while output per worker increased by 0.4% over the same period.
2) … but is still trending below its pre-crisis average
The good news needs to be moderated, however. The pickup in labour productivity comes after two quarters of contraction, leaving the annual rate of increase over the past 12 months at just +0.6% - well below its pre-crisis average of around 2% annually.
3) The overall figure masks a widening productivity gap among firms
Research by the OECD
suggests that productivity growth remains highly concentrated among some firms and industries that are close to the global technology frontier. This is because innovation is not being diffused or taken up by as many firms given their lack of resources and skills to adopt new technologies and techniques of production. As a result, the productivity gap between the frontier and laggard firms has widened further in recent years.
4) This is a reflection of diverging trends in firms’ investment in process improvement
Our freshly released Innovation Monitor showed that companies are not going at the same pace when it comes to the adoption of modern processes and technologies.
Although two-thirds of manufacturers said they introduced process innovations in the past three years, only 45% of companies introduced ICT to improve processes and lees than one in ten introduced ICT to improve delivery and logistics.
So what's holding manufacturers back from investing in cutting-edge process innovations?
5) Manufacturers over rely on internal capabilities when introducing new processes
Our survey showed that process innovation remains highly reliant on internal capabilities – with manufacturers always involving senior managers (88%), engineering/R&D department (65%) and shop floor employees (59%) in strategic decisions.
Although a proportion of companies would always (16%) or sometimes (62%) involve customers or clients in their decisions, supply chain cooperation remains underweight.
By contrast, access to external expertise is lacking with 44% of companies never involving consultants when introducing new production techniques. Similarly, industry-academia interactions on process innovation are low. Most of our survey respondents said they never involve Catapult centres (90%), KTPs (73%) or universities (43%) when introducing new processes.
6) Companies are hesitant about the benefits of process innovation
Uncertainty is inherent to any type of innovation activity and process innovation is no exception. One in three companies responding to our survey said they underestimated what process innovation would involve, while more than a quarter said they were uncertain about the outcomes.
On the other hand, companies are still hesitant about what the adoption of ICT could bring, just 42% say they are familiar with the concept of 4IR and only 11% think the UK manufacturing sector is geared up to take advantage.
7) Cash is also seen as an issue
Process innovation is more likely to be funded internally, and a third of survey respondents said they lacked the required resources within the business to implement new processes. By contrast, lack of external finance was less of an issue.
Chancellor, the ball is in your court
Next week, the Chancellor will present his Autumn Budget to Parliament. With Brexit woes looming large on businesses’ minds, manufacturers need reassurances that Industrial Strategy is not completely off track.
This should include policy actions to boost business investment in process innovation and bring manufacturers to the productivity frontier.