The Daily Update - UK productivity disappoints

A lot of things have happened in the last decade; but productivity growth in the UK doesn’t seem to be one of them. The latest Q1 2017 flash estimate for quarterly productivity growth from the UK’s Office of National Statistics (ONS) came in at -0.5%. This is just enough to bring the index level back to 101.8 – in line with where it was back in Q4 2007… Yes it has been that long since the Global Financial Crisis (GFC). Now, with just 3 more quarters of the same mediocre performance (as can be expected in many countries including the UK), a number of countries will be able to join Japan in the ‘lost decade’ camp. Had productivity growth remained at the modest 2% long-term trend that the Office for Budget Responsibility forecast, the index would be closer to the 124 level - i.e. in aggregate we would all be almost a quarter more productive by now (or come to think of it could achieve the same productivity on a 4 day working week). When ranked amongst the G7, the UK comes joint 5th with Canada, with only Japan trailing behind. Such that, comparing GDP per hour worked Germany, US and France are each around 35%, 30% and 25% more productive respectively. It’s clear the UK has a productivity problem. But is it a temporary slump or is the present mediocre productivity growth closer to what we should expect going forward?

The ‘just a slump’ thesis seems to use growth in the 80’s, 90’s and early 00’s as a gauge for the longer-term trend. But when one breaks these numbers down by industry a vastly outsized productivity boom occurs in the mining sector (which includes North Sea Oil) and, to a lesser but still substantial degree, in financial services throughout this period. Both of these sectors’ productivity began to contract in the mid 00’s (before the financial crisis) and according to the ONS are now only 55% and 90% as effective in generating growth-per-hour than they were in 2007. Such a pronounced and short lived spike/reversion could help explain a great deal of why recent productivity growth has been so depressed - but with the caveat that one must also accept that it significantly dampens the ‘sustainable’ long-term productivity growth trend in prior decades.

If so, this would be just another example where long-term growth expectations seem to be biased towards the upside; with the reality that the most recent decades prior to the GFC are not the best gauge for normal and sustainable growth expectations; at least without adjusting for factors such as the boom in North Sea Oil and financial services. It’s been almost 10 years and markets still seem to be waking up to the idea of terms such as ‘secular stagnation’ and all their implications. The latest productivity figure from the ONS is only a short term disappointment. But come the end of the year when the idea of a lost decade really starts to set in, perhaps more will begin to question whether even 2% is a realistic and balanced long-term growth expectation for an advanced economy with an aging population and stagnant wages.

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