UK productivity sees further dip in Q2 after relapsing markedly in Q1 - EY ITEM Club

16 August 2017

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  • UK productivity saw further dip in Q2 after relapsing markedly in Q1
  • The second successive dip in productivity fuels concerns over the UK’s overall poor productivity record since the deep 2008/9 recession
  • There is a risk that prolonged uncertainty and concerns over the UK’s economic outlook could ends up weighing down markedly on business investment and damage productivity

Howard Archer, Chief Economic Advisor to the EY ITEM Club, comments:

“A ‘flash’ estimate from the Office for National Statistics (ONS) indicates that UK productivity fell marginally further in Q2 after a marked relapse in the Q1. The second quarter dip was the consequence of gross value added in the economy growing at a slower rate (0.3% quarter-on-quarter (q/q)) than the number of hours worked (up 0.4% q/q), which were primarily lifted by higher employment.

“Specifically, ONS data shows output per hour worked fell 0.1% q/q in the Q2 2017 after a drop of 0.5% q/q in Q1. Consequently, output per hour was also down 0.1% year-on-year (y/y) in Q2 after an increase of just 0.3% y/y in Q1.

“The further relapse in Q2’s productivity fuels concerns over the UK’s overall poor productivity record since the deep 2008/9 recession. This even allows for the possibility that there may well have been an appreciable cyclical element in the drop as GDP growth was slow in the first half of 2017 and business seemingly remained keen to employ amid potential shortages of labour. Given the uncertain economic and political outlook, it may be that several companies are trying to meet extra work by taking on labour rather than commit to investment. Persistent low earnings growth is facilitating labour growth. Productivity had seen growth through 2016, but it was hardly dynamic.

“The further second quarter dip in productivity is all the more disappointing as the UK has a lot of catching up to do on the productivity front as it has been markedly lagging its performance before the 2008/9 downturn.”

Number of factors may be holding back UK productivity 

“The UK’s ‘productivity puzzle’ is a source of much debate and analysis. Part of the UK’s recent poor labour productivity performance has been that low wage growth has increased the attractiveness of employment for companies. This was clearly a major factor causing employment to hold up well during the downturn and since then has picked up markedly.

“It may currently be the case that employment is being lifted by a number of UK companies being keen to take on workers or at least hold on to them given concerns over labour shortages in some sectors and reports of fewer EU workers coming to the UK since last June’s Brexit vote.

Structural factors limiting productivity

However, there are a number of factors that may have hurt productivity on a more lasting basis. Many of the new jobs that have been created are in less-skilled, low-paid sectors where productivity is limited.

“The economy’s past prolonged weakness and financial sector problems may have hurt productivity through under-investment and an inefficient allocation of resources. There is particular concern that an extended inability to access capital held back innovation and investment by smaller companies.

“In addition, there has also been apprehension about the impact of so called ‘zombie’ companies. Not only are these companies generally less productive, but some feel that they may also be hinder credit and resources from being reallocated to newer companies and backing new products and processes.

“There is a risk that prolonged uncertainty and concerns over the UK’s economic outlook could end up weighing down on business investment and further damage productivity. Difficult Brexit negotiations could increase this risk, particularly if international companies markedly reduce their investment in the UK and thereby dilute any beneficial spill-over of skills and knowledge.”

 

 ENDS