Productivity or growth – which comes first?
Written by: Matthew Wrelton on 17 January, 2012David Smith, the Economics editor of the Sunday Times, wrote a typically insightful piece on Sunday in which he explored two of the most fundamental questions for the UK economy over the next few years:
- Will UK productivity growth – i.e. output per worker – resume its earlier upward trend?
- Is the damage to the economy from the crisis and recession as bad and as permanent as feared?
In response to the first question, he sets out two factors which give grounds for optimism. First, he argues that given there was no meaningful growth in public sector productivity since the mid 1990s, a rebalancing of the economy away from the public to the private sector ‘should automatically boost productivity.’ This seems entirely logical as the productivity of the private sector outweighs that of the public sector. Secondly he points towards recent figures from the ONS which suggest that output per worker rose 1.2% in the third quarter of 2011 and was up on a year earlier. The manufacturing sector in particular performed well with productivity at record levels.
Nevertheless, the UK would have had a ‘mountain to climb’ to avoid a fall in GDP in the final quarter of 2011 according to Smith. Industrial production was down in October and November and the services sector also had a disappointing start to the fourth quarter. Such factors in addition to continuing uncertainty across the Eurozone all suggest that the UK will have returned to negative growth in the final quarter of 2011. This analysis was supported yesterday by the ITEM club, which stated in its winter 2011-12 forecast that the UK economy is ‘on hold’ and in a ‘state of paralysis’.
Smith argues that ‘before productivity, we need greater production’, yet as he concludes ‘it is hard to have one without the other’. Clearly GDP growth is dependent on increasing the volume of production but it would be prudent to assume that when demand does return, the international competition to meet that demand will be fierce. Ensuring that firms are in a fit state to compete for market opportunities is going to be critical to successful recovery and that means thinking about maintaining or raising productivity now, rather than simply waiting until the recovery starts.
Interestingly when you look at the US economy since 2008, there’s plenty to suggest that many companies got leaner and through the recession, therefore increasing their productivity and are now beginning to hire to meet growing demand. This was explored in a recent Economist article which is well worth a read. This suggests that increasing productivity in a time of recession not only helps companies ride out the worst of times but can act as a spur to longer term growth, once even relatively weak demand starts to return.
There are plenty of opportunities for productivity growth out there and even before the crisis there were significant gaps in productivity between sectors and between businesses of varying size. If we could begin to address these gaps, the boost to the economy would be significant. Now is the time to identify what levers we have to boost productivity and how they could be pulled.
(An excerpt from David Smith’s article can be accessed here).
Tags: David Smith, growth, productivity, Sunday Times
