Press release

14 Apr 2021 London, GB

UK productivity down in Q4 2020 and underlying concerns remain – EY ITEM Club comments

UK productivity – measured in terms of output per hour – fell in Q4 2020 after bouncing back in Q3 from declines in Q2 and Q1. Output per hour fell 4.3% quarter-on-quarter (q/q) and 0.7% year-on-year (y/y) in Q4 2020

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Related topics Growth COVID-19
  • UK productivity – measured in terms of output per hour – fell in Q4 2020 after bouncing back in Q3 from declines in Q2 and Q1. Output per hour fell 4.3% quarter-on-quarter (q/q) and 0.7% year-on-year (y/y) in Q4 2020. 
  • The UK's productivity performance through 2020 was erratic, having been distorted by COVID-19-related restrictions on economic activity. Overall, output per hour edged up 0.4% over the year. The ONS indicated that positive productivity growth despite the pandemic was due to a change in the distribution of economic activity between industries.
  • Output per worker increased 1.6% q/q in Q4 but was down 5.9% y/y. Output per worker fell 9.6% over 2020. This reflected the fact that the furlough scheme reduced hours worked but protected workers' status as employed.
  • There is a risk 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 contracted 10.2% in 2020 despite some recovery in the second half, 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 be having mixed implications for productivity. The time saved commuting may be lifting output for many workers, but productivity may also 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.
  • Meanwhile, many of the new jobs that have been created years prior to the pandemic 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 4.3% quarter-on-quarter, according to the Office for National Statistics (ONS). It had previously increased 6.5% quarter-on-quarter in the third quarter after falling 1.7% in the second quarter and 0.9% in the first quarter.

“Output per hour worked was down 0.7% year-on-year in the fourth quarter of 2020 after a gain of 4.0% year-on-year in the third quarter and a fall of 1.8% 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 0.7% year-on-year in the fourth quarter of 2020 as gross value added (GVA) fell 7.5%, while hours worked were down 6.8%.

“Output per hour worked edged up 0.4% overall in 2020 having been flat overall in 2019 after a small gain of 0.5% in 2018. The ONS reported that a changing distribution of economic activity between industries is the main reason why productivity hasn’t declined in the same way that it did in the 2008-9 downturn.

“The ONS noted that the sectors which saw a fall in their relative share of hours worked typically had lower productivity levels. Its report pointed out that ‘compared with a whole economy average productivity level of about £36.00 per hour worked in 2019, the food and beverage services industry was about 54% less productive.’ Conversely, higher productivity industries increased their relative share of hours worked. The ONS found that ‘the legal and accounting and computer services industries had productivity levels of £41.40 and £38.20 per hour worked in 2019 respectively, 15% and 6% above the whole economy average.’”

Output per worker has been significantly affected by furlough scheme

Howard Archer continues: “Output per worker rose 1.6% quarter-on-quarter in the fourth quarter of 2020 but was still down 5.9% year-on-year. It had previously risen 17.6% quarter-on-quarter in the third quarter following a record decline of 18.7% in the second quarter when it was down 21.1% year-on-year. There was an earlier fall of 3.1% quarter-on-quarter and 3.1% year-on-year in the first quarter. Overall, output per worker fell 9.6% in 2020.

“The ONS has reported that the difference between the two measures – output per hour worked and output per worker – is because of the Government’s furlough schemes.”

UK has a lot of catching up to do on productivity

Howard Archer continues: “With marginal overall improvement in productivity over 2020 in terms of output per hour, the UK clearly still has a long way to go following what has been a weak trend since the 2008-9 recession.

“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 quickly as growth returned. 

“It also appears that, given the uncertain economic and political outlook in recent years, many companies took 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.

“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. Business investment fell 10.2% over 2020 as it was adversely affected by the impact of the pandemic on economic activity and business confidence. Positively, there was a limited recovery over the second half of the year, but business investment in Q4 2020 was still 8.3% below its peak level in Q2 2017.

“Productivity may also have been affected in 2020 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.

“Meanwhile, many of the new jobs that have been created in recent years – prior to the pandemic – 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 – 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.

“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 build-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.”