Peter Hemington, corporate finance partner at BDO, looks at the UK’s stubbornly low levels of productivity and what the Government needs to do to give it a boost.
The latest figures from our monthly economic tracker, Business Trends, suggest the UK’s productivity crisis is deepening.
Our report shows that while firms are continuing to hire more staff, business output is struggling to pick up. The amount of output produced for each hour worked is therefore likely to slow further, undermining the UK’s alarmingly low productivity levels.
BDO’s Employment Index – which indicates firms’ employment intentions – is above the long-term trend and has risen 0.1 from February to 102.0. Employment has grown steadily for the last six months and the unemployment rate, currently at 4.7%, is at its lowest in over 40 years.
However, despite the positive employment figures, BDO’s Output Index – which indicates how businesses expect their order books to develop over the next three months – has fallen to 95.9. It is well below the long-term growth trend of 100 and is sliding closer to the point of contraction, below 95.0. The figures reveal the severe difficulty the UK economy is having boosting productivity, despite marginal increases announced by the ONS in early April.
Productivity and inflation
The impact poor productivity is having on businesses is also being passed on to household incomes. Earnings growth is almost half what it was before the financial crisis and reflects the low productivity gains. Meanwhile, BDO’s Inflation Index reached a new five-year high of 105.2 and with prices of goods continuing to adjust following the recent currency depreciation, inflation looks set to rise even further in the coming months. These factors combined indicate that if productivity doesn’t improve quickly, consumer spending will be strained even further.
So what can be done?
Poor productivity performance is one of the UK’s biggest economic challenges. The Chancellor spoke at length about solving the productivity puzzle when he delivered The Budget, announcing measures to invest in technical education and digital infrastructure to improve productivity. But his measures are very unlikely to be enough. The UK is a low investment economy with an education system that doesn’t always deliver the goods. Successive governments should be applauded for the hard work done to improve education in England, which has shown real progress in recent years. But technical education has not improved and there must be doubt as to whether this nettle is really being grasped. As for investment, the government should have the courage to borrow more to invest in the nation’s increasingly threadbare and out of date infrastructure.
Where next? A new economy
Our New Economy report, which makes a number of policy recommendations for a thriving post-Brexit UK economy, also suggests some smaller scale but quick to implement and effective policies – for instance by increasing the annual investment allowance for mid-sized businesses, encouraging degree apprenticeships and increasing funding to help businesses modernise themselves for the challenges ahead.
Peter Hemington is Partner and Head of Corporate Finance at BDO