Press release

23 Feb 2021 London, GB

UK productivity down in Q4 2020 as underlying issues remain – EY ITEM Club comments

UK productivity declined in Q4 2020, after bouncing back in Q3 following falls in both Q1 and Q2

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  • UK productivity declined in Q4 2020, after bouncing back in Q3 following falls in both Q1 and Q2.
  • The UK's productivity performance through 2020 was distorted by COVID-19-related restrictions on economic activity.
  • Overall, output per hour edged up 0.3% over 2020 while output per worker fell 9.6%. This reflected the fact that the jobs furlough scheme reduced hours worked but protected workers’ employment status.
  • Output per hour fell 4.5% quarter-on-quarter (q/q) and 1.1% year-on-year (y/y) in Q4 2020. Output per worker increased 1.4% q/q in Q4 but was down 6.5% y/y.
  • A risk is that the significant impact of COVID-19 on the UK economy over 2020 has a lasting negative impact on productivity and UK growth potential. Business investment was weak overall in 2020 despite a limited recovery in the second half. It contracted 10.7% in 2020 and has been soft for an extended period.
  • Productivity may also have been affected by businesses investing to make their premises compliable with social distancing requirements rather than using the resources to invest in new equipment and productive practices.
  • Increased home working may well be having mixed implications for productivity. Positively, the time saved commuting may be lifting output for many workers. Negatively, productivity may be affected by reduced social interaction and the build-up of experience from people being in the office.
  • The hope is that the successful rolling out of the COVID-19 vaccines over the coming months fuels a significant boost to business confidence and willingness to invest, with favourable implications for productivity.
  • Part of the UK’s recent disappointing labour productivity performance has been that – where possible – companies have preferred to take on labour rather than commit to costly and difficult-to-reverse investment, given an uncertain economic and political outlook over the last few years.
  • Other factors may have negatively affected productivity. Many of the new jobs created in recent years have been in less-skilled, low-paid sectors where productivity is limited. Some have also argued that the UK has been poor at transferring technology and know-how from the most productive companies to others.

Howard Archer, chief economic advisor to the EY ITEM Club, comments: 

“UK productivity – measured in terms of output per hour worked – weakened in the fourth quarter of 2020 as it fell 4.5% quarter-on-quarter, according to the Office for National Statistics (ONS). It had previously risen 5.6% quarter-on-quarter in the third quarter after falling 0.7% in the second and 1.1% the first.

“Output per hour worked was down 1.1% year-on-year in the fourth quarter after a gain of 4.0% in the third and a fall of 1.0% in the second. The ONS has said that quarterly movements in productivity measures can be erratic so year-on-year rates give a better indication of trend. 

“Output per hour worked fell 1.1% year-on-year in the fourth quarter as Gross Value Added fell 7.9%, while hours worked were down 6.8%.

“Output per hour worked edged up 0.3% overall in 2020. It had previously been flat overall in 2019 after a small gain of 0.5% in 2018.”

“The marginal improvement in productivity over 2020 in terms of output per hour highlights that the UK still has a long way to go following what has been a weak productivity trend since the 2008/9 recession.”

Output per worker has been significantly affected by furlough scheme

Howard Arched continues: “Output per worker rose 1.4% quarter-on-quarter in the fourth quarter of 2020 but was still down 6.3% year-on-year. It had previously risen 16.6% quarter-on-quarter in the third quarter following a record decline of 17.9% in the second quarter when it was down 20.5% year-on-year. There was an earlier fall of 3.2% quarter-on-quarter and 3.3% year-on-year in the first quarter.

“The ONS has reported that the difference between the two usually closely aligned measures – output per hour worked and output per worker – is because of the government’s furlough schemes. Overall, output per worker fell 9.6% in 2020.”

A number of factors may have held back UK productivity

Howard Archer continues: “Part of the UK’s ‘productivity puzzle’ has undoubtedly been that low wage growth has increased the attractiveness of employment for companies. This helped employment to hold up well during the 2008/9 downturn and to pick up as growth returned. 

“It also appears that, given the uncertain economic and political outlook in recent years, many companies have taken on labour rather than committing to costly and difficult-to-reverse investment. The low cost and flexibility of labour relative to capital has certainly supported employment over investment.

“Extended uncertainties over the future of the UK-EU trading relationship caused companies to limit their investment with implications for productivity. Business investment has been low since the second half of 2017 and it rose just 1.1% in 2019 after contraction of 2.5% in 2018. While business investment rose 9.4% quarter-on-quarter in the third quarter, this was a modest rebound after a record decline of 25.4% in the second quarter and a decline of 0.7% in the first. This meant that business investment in the third quarter was 19.0% below its level in the fourth quarter of 2019.

“There are a number of structural factors that may have negatively affected productivity. Many of the new jobs that have been created in recent years have been in less-skilled, low-paid sectors where productivity is limited. A report by the NIESR and the Joseph Rowntree Foundation in 2018 concluded that productivity is particularly poor in low-paid jobs in the UK compared with other major economies, lagging up to 20-30% behind similar roles in Germany, France and the US.

“Similarly, ONS analysis has concluded that much of the slowdown in UK productivity has been due to the changing composition of the UK economy with workers moving from more efficient sectors – such as mining – to less efficient sectors – such as food and catering. Nevertheless, the ONS also observed that there had been a slowdown in productivity growth in a number of sectors, including financial services, telecommunications and manufacturing. 

“The Bank of England’s chief economist has also argued that the UK’s productivity problem has been influenced by an unusually wide gap between Britain's most productive firms and the much longer tail of its least productive companies. He has suggested this is a consequence of a ‘diffusion’ problem with the UK relatively poor at transferring technology and know-how.

“In addition, there has been concern about the impact of so-called ‘zombie’” companies that have been helped to keep going through very low interest rates.” 

Outlook

Howard Archer comments: “The concern is that COVID-19’s impact on the UK economy over 2020 has had a significant negative impact on productivity and UK growth potential.

“In particular, business investment fell significantly over 2020 and has been weak for an extended period. Indeed, business investment in the fourth quarter of 2020 was 11.4% below the peak level seen in the fourth quarter of 2017.

“Productivity may also have been affected by businesses having to invest to make their premises compliable with social distancing requirements rather than using the resources to invest in new equipment and productive practices.

“Increased working at home may well be having mixed implications for productivity. On the positive side, the time saved commuting may be lifting output for many workers. On the negative side, productivity may be affected by the absence of social interaction and the building up of experience people gain from being in the office.

“The hope is that the ongoing successful rolling out of the COVID-19 vaccines over the coming months fuels a significant boost to business confidence and willingness to invest, with favourable implications for productivity.