Lost Productivity Killing the West

The developed world’s economy is still staggering shakily after the credit bubble burst in 2008, all the indicators are flat-lining or falling; GDP growth is poor, liquidity is tight, employment is falling and real interest rates are negative, but above all productivity is the problem.  Productivity is a calculation that takes constant price GDP per hour worked and per worker or all GDP divided by the average number of people in work in the year and divided again by the average number of hours worked.  The charts express this as an index based at 100 in 2007.
For the UK big question though is not the incremental issue of whether we are counting the numbers correctly it’s our ability to compete with the more agile, younger economies in the developing world.  In the UK the only industry that can compete on this global stage is our financial service industry and this has been badly shaken and in now being regulated to death by US and European politicians who know nothing about finance.  We need to protect this industry with all our strength and find one or two other winners where we have a solid foundation – defence / aerospace, Pharmaceuticals / health and digital marketing might be candidates.  What is lacking is an industrial policy and the structural reforms and programmes that are needed to under-pin are economic future, if we can get that right productivity will look after itself.Prior to 2006 the G7 had been able to rely on gradual improving productivity except in the UK and the US where gains were more rapid.  These significant improvements were a function of our investment banking boom and a more agile ‘Anglo Saxon’ business model.

Indices based  at 100 in 2007

Since 2007 the G7 has had a combined productivity increase of about 0.5% annually and it’s this statistic that has got the economists and politicians worried.  One would expect productivity to decline in the aftermath of a financial crisis and at the start of a recession as demand drops quicker than the cost saving adjustment businesses need to make (lay-off staff), but normally it recovers very quickly as business have to do more with less.

The horror show since Lehman Brother collapse

There are a number of prognoses of the productivity problem.The Economist has been investigating the problem of aging populations in the west and the drag this has on our productiveness, as someone in the second half of his life I think their view is somewhat ageist – but it’s interesting.  “Workers in their 20s and 30s are likely to show the fastest marginal increases in productivity as they receive formal training and get more experienced at their jobs. It is hard to define an exact age at which productivity starts to decline. The answer will vary from industry to industry and from worker to worker”.http://www.economist.com/news/finance-and-economics/21577414-productivity-challenge-rich-worlds-demography-age-shall-weary-themEssentially they are telling us that only people below the age of 55 are able to become more productive and that the combination of youth unemployment and our aging work profiles are killing us from a productivity stand point.  I could see this being important in an economy where a larger proportion of GDP come from manufacturing but its less convincing in a services based economy like the UK’s.Next up is the well-trodden route of Zombie businesses and this seems to be more believable.  Essentially the negative real interest rates have allowed badly run and heavily indebted business to survive, in a normal recessions real interest rates will be positive and this would force poor business to fold (unable to keep up repayments), this drives up unemployment but it quite quickly drives up productivity as the surviving business have few competitors and they retain only their most productive staff.  There is certainly an issue with this in the UK where quantitative easing has been used to reduce interest rates forcing creditors to refinance our banks. This strategy has not been balanced by structural reforms clear up distressed debt, so there are a mass of indebted business and private individuals who are weighing down the UK’s productivity.  The current policies in the US and Japan are likely to have the same effect on their economies.The next area of concern is the rise of the black economy and part time working.  The recession has forced large numbers of people to be creative about how and when they work.  Many have opted for part time roles, which under the radar of the government revenue collection agencies.  The ‘black’ economy has always been an important part of the Southern European economic model and the habit is migrating north.  High taxes and less available work is forcing people into this cash only world and the efforts of these workers never make it into the published statistics for productivity.  Evidence for this changing employment pattern may be the relatively low level of house repossessions and person bankruptcy.Finally we are now experiencing the real effects of the digital age.  According to the Boston Consulting report, The Connected Kingdom, internet businesses contributed about £100bn to the UK economy in 2009, or 7.2pc of all economic activity.  Whilst we should recognise the credibility of Boston Consulting, their number is a guess rather than an estimate and none of the data collection agencies in the UK have a clue about the scale and value of our digital economy.  Independent commentators tell us that: “It is increasingly and overwhelmingly likely that the digital economy is being underestimated in the official numbers.” The Office of Nations Statistics (ONS) is preparing to introduce a new model for measuring the internet economy next years, which will create the normal political row when data collection methods change!  There is good evidence that we are under counting the numbers in this area as the proportion of the economy accounted for by information and communications is still the same as it was 15 years ago. This cannot be right, given the degree of structural change the internet is unleashing.   The new number in 2014 will include investment in research and development. For the UK, it is estimated that the changes will add about one percentage point to GDP. And improve our global productivity rating.