UK: Deloitte Monday Briefing: The UK’s Productivity Puzzle - Producing Less With More People

Last Updated: 1 May 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017

The Monday Briefing, written by Ian Stewart, Deloitte's Chief Economist in the UK, gives a personal view on topical financial and economic issues.

  • One of the bright spots of the UK's economic performance in recent years has been the strength of the labour market. Output has slumped, but the number of people in work has risen. This has softened the human cost of the UK's deepest recession since the 1930s. But with more people producing less, the result has been a sharp decline in productivity.
  • In the last five years the total output of the UK economy has fallen by 2.9% and employment has risen by 0.7%. As a result, productivity, or the volume of goods and services produced by each working person, has fallen by 3.6%.
  • US productivity has soared through the downturn but the UK can, perhaps, take some comfort from the fact that productivity growth in Italy, France and even Germany has been weak in the last few years.
  • Declining productivity hits competitiveness and makes it harder for the UK to export its way back to growth. Poor productivity helps explain why, despite the large, 30% devaluation in the pound in 2007-08, the UK's export performance has been so poor.
  • If low productivity is here to stay the UK has a long term growth problem. Understanding the causes of the productivity conundrum is vital to gauging the UK's growth potential.
  • Some argue that the growth in labour intensive, lower productivity services and the decline in manufacturing have hit UK productivity growth. Yet manufacturing has been declining as a share of the economy for more than 30 years and this hardly seems a plausible explanation of the UK's recent productivity performance.
  • Another potential explanation is that when the recession hit employers hung onto surplus workers in the hope of a quick rebound in growth. The aim was to avoid the cost of laying off staff and then having to rehire them as growth returned. This may explain the resilience of employment in 2008-09. But it does not explain why, four years later, and against a backdrop of a weak and uncertain growth, employers have continued to hire.
  • But there is an alternative labour market explanation which, to us, seems more plausible. The willingness in this cycle of employees to accept lower real wages and changed terms of work has enabled business to squeeze wage costs and hold on to more workers. A lower marginal cost of labour seems may well have resulted in a lower marginal return to labour. Yet this effect seems likely to reverse as the economy, and wages, start to rise.
  • Some observers believe low UK productivity may be a function of the rise in the number of "zombie companies" – weak and inefficient companies which are able to survive thanks to low interest rates and a supposedly more tolerant attitude to corporate borrowers by banks.
  • This may explain some of the UK's poor productivity performance. However, the point of low interest rates is to keep companies that have a viable long-term future in business while demand is temporarily weak. As the demand recovers many of these "zombie" companies are likely to revive.
  • For us an obvious explanation for low productivity is that this recession has hit finance, a high productivity sector, very hard. As a result the economy has been more dependent on low productivity sectors, such as the public sector, and this has slowed whole-economy productivity. If the global financial crisis has caused a lasting shrinkage in the UK financial services sector this would represent a permanent loss of productivity to the economy. This strikes us as a serious risk.
  • But for us the most likely principal cause of the UK's poor productivity performance is that companies have been investing less. The resulting deterioration in the UK's stock of tangible and intangible assets – from machinery and buildings to highly trained workers and research and development – has made employees less productive.
  • If this is the case then a revival in capital spending would reboot productivity. It is, perhaps, no coincidence that US productivity and investment have held up well in recent years. Collectively UK companies have ample reserves of cash. The largest businesses, which are the main drivers of capital spending, have good access to credit. The corporate sector probably has the means to invest and, with existing capital assets wearing out, they have a growing need to do so. Our hunch is that the next few years are likely to see stronger capital spending which will give a fillip to productivity.
  • So we think that, on balance, the UK's dire productivity performance is likely to reverse as growth comes back. If we are wrong the economy is in a much bigger hole than most people think.

MARKETS & NEWS

UK's FTSE 100 ended the week up 2.2%.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • The UK economy grew by a better-than-expected quarterly rate of 0.3% in the Q1 2013
  • The US economy grew at a slower-than-expected annualised rate of 2.5% in the Q1 2013, although consumer spending was stronger-than-expected
  • Measured US output will rise by as much as 3% in July due to a revision in how GDP is calculated with 'intangible assets' such as spending on research and development and film royalties included in capital spending for the first time
  • The decade between 2001 and 2011 saw the first fall in the proportion of British people owning their homes since 1918, with 64% of people owning their homes in 2011 compared to 69% in 2001, according to data from the ONS
  • Italian benchmark bond yields fell below 4%, their lowest level since November 2010
  • Spanish banking group Bankia, which required a bailout last year, announced profits of €74m in the first quarter of 2013
  • Spanish unemployment rose above 6 million for the first time, with 27% of the workforce unemployed
  • Russian tycoon Alisher Usmanov, who owns almost a third of Arsenal football club, has been named as the UK's richest man, displacing Indian steel magnate Lakshmi Mittal at the top of the Sunday Times Rich List
  • Reuters reported that Japanese banks are hiring Spanish-speaking bankers to win new business in Latin America as they search for higher returns abroad
  • Bill Gross, manager of the world's largest bond fund for Pimco, criticised European austerity by claiming that "the UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth"
  • The UK government confirmed that it would be putting its one-third stake in the uranium enrichment company Urenco up for sale in the 2013-14 financial year, potentially raising up to £3bn
  • Online gambling group Betfair rejected a £910m indicative proposal from CVC Capital Partners
  • The planned sale of 610 branches of Lloyds Banking Group to the Co-operative Group fell through, with the Co-op citing the worsened economic outlook and increased regulatory environment
  • Apple reported its first quarterly fall in profits in a decade, with net profits of $9.5bn in Q1 2013, down from $11.6bn in Q4 2012
  • Korean firm Samsung Electronics announced record first quarter profits, with net profits having risen 42% compared to a year earlier, driven by strong smartphone sales
  • Spending on beauty and personal care products has increased by 11% per person since the start of the credit crisis in 2007, according to the latest British Lifestyles report from Mintel
  • Racecourse owner the Jockey Club has launched the first retail bond in British sport, where investors can invest between £2,000 and £100,000 in the Racecourse Bond, paying the equivalent of 7.75% interest a year before tax
  • Sandwich chain Pret a Manger revealed that the most popular item on their menu is the banana, selling around 75,000 of the fruits every week – Pret a Peel

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.