Trying to unpack the productivity puzzle

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Productivity, productivity, productivity… well it seems to be a big deal since everyone is talking about it. And indeed it is!

Our new publication which will be released on 8th May (keep an eye on this page) will try to shine a light on the productivity puzzle and in particular what happened to manufacturing productivity in the last two decades.

Manufacturing has always been the key player for growth

Historically, and not just in the UK, manufacturing has always been in the driver’s seat in terms of driving the whole economy productivity at higher levels.

 

doughnut
 

 

As the doughnut graphs show, between 1994 and 2017 UK manufacturing outperformed the service sector and the whole economy. The result was great considering that output per hour in manufacturing grew twice as fast as services, the major UK sector.

So, all good here, right? Well, not so much recently.

Since the aftermath of the Great Recession something stopped working as it used to


mfg-flat-line  

 

The graph clearly shows how the vertiginous growth experienced by the sector between 1997 and 2007 has plateaued in this decade with average annual productivity growth moving from 4.1% to 0.9% (1.2% when excluding the crisis period of 2008-09).

Notably, this is not just a manufacturing problem, indeed the average service sector productivity grew only by 0.5% between 2010 and 2017. And this is also something seen in other advanced economies, even if the UK problem seems to be more accentuated.

We said it before and we believe it: manufacturing drove productivity growth in the past and it can do that again!

 

That’s why we are trying to unpack the puzzle

Different sectors of the whole economy are different between each other and we know that the same is true within manufacturing. Building an aeroplane is not the same as manufacturing a packet of crisps or a piece of agriculture machinery.

That’s why a “one fits all” approach to fix the problem is not appropriate and the government Industrial Strategy must take these differences into account.

With our analysis we have tried to unpack the productivity problem analysing different manufacturing sub-sectors and comparing them to international comparators to understand better the single performance and if, by any chance, the UK is following the same path as our partners or diverging from them.

 

Wait, but does it really matter?

Yes, it does. Even if UK manufacturing and the whole economy demonstrated to be successful and highly profitable, productivity is fundamental for a sustainable long-term growth.

Productivity means doing more with less and on a national level this translates into higher wages, higher consumption, higher tax-revenues and everything connected to that (better living standards, higher education and better healthcare).

Productivity is also the only, or at least the most effective, cure for some of the short-term and, even more, long-term issues our society is facing.

In the short-term, the current UK job market is close to full capacity and the Brexit process is already hitting the number of workers moving, or willing to move, in the UK to increase the labour supply.

In the long-run, advanced economies (including the UK) will need to deal with an increasingly ageing population and an extremely skewed old-age dependency ratio (the ratio between people in the workforce and those too old to work). Thus, doing more with less (people) is the key to keeping economic growth stable.

 

 virtuous-cycle 

 

But it is not just about UK as a whole. The “virtuous cycle” above describes why productivity matters for companies. We have also highlighted the importance of productivity in our latest mechanical equipment sector bulletin where we have noticed how the sector was extremely competitive on the international market during the period of productivity expansion (endogenous competitiveness) and less competitive and more reliant on the exchange rate (exogenous competitiveness) in the period of flat lining productivity growth.

 

This is a call for evidence

With our analysis we have already focussed our attention on five factors that might have an impact on productivity. To find out what are the factors and to know more about them, you can join our webinar on 10th May (click here to join us) and you can read our analysis when published on 8th May.

Your opinion is important to us and we would like to receive your answers to the questions you will find at the end of the report.

 

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