10 April 2017
What is productivity?
We have heard much about this country’s stagnated rate of productivity.
Productivity is the measure of output per hour worked and nationally is measured by dividing Gross Domestic Product (GDP) by the number of hours worked. Like all such statistics there are problems with the actual measurements and approximations, but assessed continuously over a period of time the trends form a reliable representation of reality. Productivity statistics are meaningless on their own so need to be compared with others, such as historical data and the performance of our global competitors. Historically the UK’s annual growth in productivity has been 2%, but since 2008/09 it has seen an unprecedented stagnation, averaging much less than 1%. In 2016 the rate was only 0.6%. Measured against other countries the UK’s productivity is 5th in the G7, after Germany, US, France and Italy. It is actually 18% lower than the G7 average.
Why is productivity so important?
The answer is that it has a direct link with living standards and a direct link with GDP growth. Growth in GDP leads to increased tax revenues, a quicker reduction in the national debt and more funds becoming available for public services. Statistics indicate that recent growth in GDP has been due to an increase in hours worked, not an increase in productivity, and with unemployment now at an historically low level, GDP growth is unsustainable without increased productivity.
The Office for National Statistics, in its briefing paper of February 2017, concludes that many eminent economists remain baffled as to why the UK is failing to improve its productivity but settles on a raft of possible reasons:
- falling productivity in oil and gas (presumably due to dwindling reserves), and in financial services;
- using higher numbers of lower paid employees rather than investing in technology and seeking other ways to work more efficiently;
- lack of investment in plants and equipment;
- lack of lending by banks to productive companies;
- employees being moved to less productive jobs;
- lack of innovation; and
- an ageing population.
In January this year, in its green paper ‘Building our Industrial Strategy’, the Government set out its aim ‘to improve living standards and economic growth by increasing productivity and driving growth across the whole country’. In his 2015 Mansion House speech Chancellor George Osborne outlined the areas on which his government would concentrate when he said that our productivity crisis was due to our not exporting enough, not training enough, not investing enough, not manufacturing enough and not building enough, and concentrating too much on London and the South East.
In spite of this the outlook for productivity remains poor. Both the Bank of England Monetary Policy Committee and the Office for Budget Responsibility have downgraded their productivity increase forecasts for the next two fiscal years and expect growth to fall well below the historical average of 2%. Uncertainty over future trading arrangements following the UK’s departure from the Single Market add to the gloom.
What does all this mean for our clients in South Yorkshire and the North Midlands?
Regional statistics reveal that the region that has exhibited the sharpest fall in productivity in the last eight years has been Yorkshire and the Humber. It is now 10th out of the 13 UK regions (including London) with productivity at about 85% of the national average. The Government’s expressed intentions to invest more in the local infrastructure are most welcome but we must also help ourselves. All of our businesses need to assess where they could improve by greater investment in plant and machinery, digital communications, staff training and exporting. Tax incentives and other forms of assistance exist for all of these essential factors. Just talk to us at UHY about it!
And here is a challenge for many small family businesses which are after all the backbone of British Industry – in general large companies with external shareholders have a much better productivity rate than family businesses. This is because they are less risk averse, and also better at attracting world class talent. Consider the typical family business where the owner has promised that ownership and management will pass on to the next generation. In these businesses the greatest challenge is to recruit the best people for the future, who may see their route to significant participation in the fruits of their success blocked by family members.
The message is clear: improve your productivity and you will improve your profitability and your employees’ living standards. In my next blog I will explore the factors that impair productivity at shop-floor level. In the meantime remember that we are here to help you prosper. Why not come and talk to us about your productivity? Contact me or your local UHY adviser for guidance specific to you or your business.
