2018q1 - the news on productivity isn't good

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Another day, anther disappointing dollop of data – this time on productivity, a statistical series ever in our thoughts. What’s happening (or not happening), can we escape the plateau and some reflections on what a helping hand from policy makers might look like.


Productivity – tanks again

On any measure you chose, productivity fell in the first three months of the year. Output per hour across the whole economy declined by 0.4%, but the drop in manufacturing productivity was much more substantial, with output per hour sliding 1.7% compared with the previous quarter.

This comes close to undoing the improvements in manufacturing productivity seen in 2017 and dashes hopes that a sustainable upturn that sees productivity start to catch up with the pre-recession trend is underway.

However, today’s data also give further credence to our recent sector based analysis of productivity as output per hour across different manufacturing sub-sectors continues to vary quite markedly.

2018q1-blog

Solid rates of output expansion in mechanical equipment – helped along by soaring demand for investment goods globally – had underpinned robust productivity growth in seven out of the past eight quarters across the sector. In contrast, productivity in the transport sector took a turn for the worse at the start of the year with output per hour falling back by 2.7%. And somewhere in the middle, it’s a steadier picture for food and chemicals. 

Manufacturing has always been a productivity driver

While last year’s productivity rebound, driven by a good export-driven bounce in output, has come to a halt, this doesn’t mean we can’t get productivity growth back on track. Manufacturing has been a major driver of productivity growth in the past and as we move from here to a digital future for the sector and the economy more widely, we still think there is scope for industry to pick up the reins again.

In a speech to the Northern Powerhouse Business Summit this week, Bank of England Governor Mark Carney again referred to the potential opportunities and benefits of new technologies associated with the 4th industrial revolution.

 

"The 4th Industrial Revolution promises an age in which anyone can produce anything anywhere through 3-D printing, where anyone can broadcast their performance globally or sell to China whatever the size of their business. In a hyper-connected, capital-light world, the future may increasingly belong to small and medium-sized firms, with platforms giving them direct stakes in local and global markets."

 

Over time it can bring productivity improvements through the adoption of new process technologies and support new business models which could give smaller companies better access to the global market place (caveated, of course, with the rest of the world wanting to remain open to trade opportunities).

This is a view we would definitely subscribe to. But it also presents a global opportunity and with many companies putting investment on the back burner (at this point I surely don’t have to spell out why…..), the bigger gains will comes to those economies that are active in supporting the adjustment to the 4th industrial revolution.

Manufacturers and government on the same page on productivity

The UK’s industrial strategy should be working to give UK companies a big leg up in that direction. The over-arching intent to improve productivity across all sectors and regions of the country is an important aim, and one which manufacturing strongly agree with, but there are still some important actions stuck in the starting blocks. For example, we’re waiting for the establishment of the industrial strategy council to put some flesh on the bones of the strategy’s objectives.

MO-18q2-survey

A potentially important government consultation on business productivity has also been underway and closes today. The review is considering a range of firm level factors which is contributing to the UK’s long tail of relatively low productivity firms. These include management practices, the provision of business support and technology adoption.

While all of these are valid areas of investigation, the firm-level scope being considered is too narrow, failing to take account of the wide sector differences in terms of productivity potential. Nor does it anchor the call for evidence in the broader aims of the industrial strategy and the need to close the gap with international counterparts. You can see our full response here.

Good news for business

Speaking of firm level analysis, one of the ongoing challenges we receive from businesses is around the issue of measurement – how does the economic analysis stack up with what companies are measuring at the firm level?

ONS have been working to bring businesses and economist closer together with the development of a new online tool. Companies can input their data to benchmark productivity with companies in their sector. This plugs an important gap and we’ve had a bit of a play and think it’s pretty neat. Businesses can get benchmarking here. Or below.

 

Author

Chief Economist

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