New government data released in the past week has shown that the UK’s productivity has fallen over the last year. Output per person hour in Q1 2023 was down 0.6% on the same quarter a year ago and output per worker was down 0.9%.
Without productivity growth, the economy cannot prosper – a continuation of this trend would mean that taxes will rise while public services will collapse for lack of funding in a death spiral.
We’ve looked into the sectoral breakdown to see which sectors have contributed most to the weakness of productivity since before the pre-Covid period. The official figures are indexed to 100 in 2019 so a figure below 100 means productivity has fallen since then, a figure above 100 that it has risen.
For the total economy GDP per person hour is up 0.6% since 2019. This rise is anaemic over three years and one quarter – the traditional ANNUAL growth expected until the 1990s was around 2% each year. There are seven sectors where the fall since 2019 is most marked on an output per hour measure.
The first is mining and quarrying (SIC Codes 04-09) where productivity is down 11.9 per cent. The bulk of this is North Sea oil production and while the exhaustion of fields will certainly have been a major cause, it seems likely that environmental considerations including the continuing restrictions on fracking have exacerbated the problem.
The second is the manufacture of transport equipment (SIC Codes 29-30) where productivity down 6.6 per cent. This sector mainly makes cars. The volume of production is down 7.9 per cent and it is likely that in a traditional mass production industry volume falls hit productivity. Brexit is almost certainly a factor, but official policy has hardly been supportive to the motor industry with huge environmental restrictions placed on the use of vehicles.
The third is the wholesale and retail sale and repair of cars and motorcycles (SIC Codes 45-47) where productivity is down a staggering 14.6%. The biggest component of the sector is retail and of course the trend to online shopping is highly unproductive as retailers need to hire additional staff in logistics and warehousing to fulfil online orders, while shoppers can stay at home and wait for the parcels to arrive. Of course, the measure of productivity does not take into account the hours that the shopper saves by buying online – though for the economy as a whole this should in theory emerge in higher output elsewhere, though there are few signs of this as yet. There should also eventually be gains in the sector from online-only retailers being able to operate with fewer staff, but these do not appear yet to be offsetting the losses from delivery.
The fourth is transportation and storage (SIC Codes 49-53) where productivity is down an even more staggering 17.2%. As with the motor industry, policies making use of motor vehicles more difficult do not help, though a key factor seems to be the structural shift in the sector towards short haul van deliveries which are of their essence not very productive. There also appear to be some issues with rail productivity.
The fifth is real estate (SIC Code 68) where productivity is down by 12.7%. Increased regulations seem to be a factor here, though as Cebr has noted the commercial property sector is facing an even bigger challenge than it did in the great financial crisis.
The sixth is government (SIC Codes 84-88) where productivity is down by 9.5%. This figure understates the damage done by falling productivity in government since this causes taxes to rise which damages other sectors as well and contributes additionally to the ‘death spiral’ resulting from low national productivity. But it is important to be aware that measuring productivity in the public sector is hard to do and the official information comes from ‘experimental’ statistics. However, the real life evidence of tax increases to pay for the public sector does provide some corroboration.
There is also a seventh sector, other service activities (SIC Codes 94-99), where productivity is down by 18.5%. This is a ragbag of different service activities but since the sector composes only 0.2% of GDP productivity changes in it are hardly likely to be a major cause of a national problem.
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When the sectors are weighted by their contribution to GDP, two of the sectors of weak productivity matter much more than the others. The first is government – had productivity in the sector not fallen, total UK national productivity in Q1 2023 would have been 1.9% higher. The second is retail and wholesale where the equivalent loss of productivity is 1.5%. Of lesser importance is transport where the hit to national productivity is 0.7%.
It might have been reasonable to expect total national productivity since 2019 to have grown by a bit more than 3% on recent trends instead of the 0.6% actually achieved.
In which case what this analysis is telling us is that pretty well all the productivity shortfall stems from wholesale and retail and the government sector.
There are sectors like technology, some areas of energy and water supply and some parts of manufacturing where productivity is still rising sharply. But these are drowned out by the problems elsewhere.
So not all the problems of low productivity in the UK can be blamed on the government. But transport policy, energy policy and environmental policy and arguably Brexit have had an impact. And the collapse of productivity in government has had a double effect, first making the major contribution to the decline in the productivity trend as a whole and to rising taxes which have also affected the economy. But online shopping has also been important although there is a definition/measurement issue.
Meanwhile increasing regulation is widely cited by international observers as a factor making the UK uncompetitive.
Too many people in the UK do not yet accept that not only has the UK got a productivity problem but that there is negative momentum and without action this problem is likely to get a lot worse as potential high skilled migrants and investors are scared off and new investment withers.
Doug McWilliams is deputy chairman of the CEBR.
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