Since the crash Britain has lost years in all-important productivity growth—but a revival will come sooner or laterby George Magnus / April 3, 2018 / Leave a comment
Productivity is the holy grail. It drives wages, consumption and general standards of health and welfare. Without productivity growth, living standards might not be that different from what they were in late Victorian times. It is the key to managing an ageing society successfully, and for Brexit Britain, it is the only way to limit the damage caused by leaving the European Union. Productivity, or rather the lack of it, is a fundamental reason for disappointing economic and social conditions since the financial crisis. Yet, there is still no consensus about why productivity is down and out, or how to fix it. Could we be looking around the wrong corner?
In the decade before the financial crisis, UK productivity growth was recorded at 2 per cent per year. Since the ensuing recession, it has been growing sluggishly at about 0.5 per cent per year. To emphasise what this means cumulatively, if productivity had continued to grow on trend after 2007, it would now be about 20 per cent higher than it is. That is the scale of what economists call our “lost decade” since the crisis.
The productivity funk in the UK looks rather curious in the wake of figures published last week by the Office for National Statistics, which show that total investment in the UK grew by 4 per cent in the year to the end of 2017, the best performance among the G7. Much of this investment was in residential and non-residential structures, plans for which were made before the referendum, but business investment, which is over half of the total, rose by about 2.5 per cent. The strongest component has been investment in intellectual property products. This is all welcome news, and you would expect it to boost productivity. And yet the productivity revival has not gained traction. Why not?
In a 2016 paper entitled “The Best v The Rest,” the OECD argued that the main productivity drag could be found in the difference between “frontier firms” and “laggards,” and that public policy should take note. The Bank of England’s Chief Economist Andy Haldane weighed in last year along similar lines, suggesting that among the many reasons for weak recorded productivity, “zombie firms” could be the answer. The thinking here is that inefficient…