The latest investment figures are not good news for productivity

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As you all know, in recent times we talked a lot about productivity (here you can find a page full of this).
Today the ONS released productivity data for the second quarter of 2018, let’s see what we can learn from them.

First of all: the headline

As expected considering that GDP and hours worked data were already known, productivity grew 0.5% in the second quarter of the year and, due to the revision to GDP, the first quarter contraction was revised down from -0.4% to -0.6%.

The main contributor to the 0.5% growth in the quarter was the one coming from the service sector excluding finance. This had an expansion of 0.9% after the contraction seen in the first quarter of 2018 (-0.3%). Particularly positive was the contribution of the wholesale and retail sector which grew by 2.3% in the quarter.

However, as we stressed several times, productivity growth has not been great since the financial crisis and the current productivity level is only 1.9% over the one registered in the last quarter of 2007.

 

If total economy performed well enough, manufacturing is not shining at the moment

After the very positive 2017, manufacturing has experienced two quarters of negative GDP growth. This, together with the fact that manufacturers have been keener to employ more people rather than invest in productive assets, had clear repercussions on productivity.

The latest data show a further decline in productivity with a contraction of 0.1% after the negative result of the last quarter (-1.3%).

 

q2_2018_contrib  

 

As the graph shows, manufacturing did not have a too negative productivity result thanks to a reduction in hours worked which offset the bad effect of the recent contraction in GVA terms.

On the other hand, the construction sector which had a fairly positive Q2 in terms of output growth, had a massive increase in hours worked which let its productivity contracting by 0.6% in the quarter.

 

But, as always, our sector is not all the same

 

q2_2018_mfg 

 

Heterogeneity is the word that you must learn when you talk about manufacturing, including when the talks are about manufacturing productivity.

The chemical & pharma sector is leading in the productivity run with a year over year expansion of almost 12% and a very good result in the quarter (+4.2%). The performance is far away from the one in the food & beverages (-4.2% in the year) and metals which sharply contracted in the last quarter (-4.0%).

What’s behind the performance?

Our previous analysis focussed on investment as a key factor for productivity growth and our latest Investment Monitor results are not encouraging.

As Lee pointed out on Monday, manufacturers have invested in the last year, however their investment intention do not look bright for the nearby future. Indeed 65% of the respondents see no growth or a contraction in investment in the next two years.

This behaviour appears to be already in the numbers according to the latest business investment data.

q2_2018_bus_invest 

 

Both total and manufacturing business investment have contracted in the second quarter of the year (-0.7% and -4.2% respectively) and their level is currently lower than the one reported exactly one year ago.

This is clearly not great news for the future of manufacturing and its productivity and that’s why we think that the next Autumn Budget needs to address the under-investment problem to make sure we will be able to get productivity back on track.

 




 

 

 

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