The uncertainty caused by Brexit is deterring companies from investing and hampering Britain’s ability to close its productivity gap with other leading developed countries, a Bank of England policymaker has warned.
Silvana Tenreyro, one of the nine members of Threadneedle Street’s monetary policy committee (MPC), which sets UK interest rates, said 75% of the decrease in growth of output per worker since the financial crisis a decade ago was due to manufacturing and financial services, but that a period of catch-up was feasible.
Productivity is an economic measure of the efficiency of a workforce. It typically measures the level of output per hour of work, or per worker.
A more productive workforce signals stronger growth and healthier public finances. Productivity gains are vital to economic prosperity because it signals that more is being achieved by workers in less time. Gains are typically achieved through advances in technology and increased skill levels within a workforce.
In the UK, productivity growth has stalled since the financial crisis, putting it behind international rivals. In 2016 the UK ranked fifth out of the G7 leading industrial nations, with only Canada and Japan having weaker levels of productivity. Germany is the most productive nation per hour, while the US is top for output per worker.
Weak productivity is problematic because it signals weaker economic growth, therefore eroding the public finances. Without an improvement in productivity, economies miss out on increases in wages and living standards, putting further pressure on the welfare system and depressing tax receipts.
Some industries are more productive than others. In the UK, manufacturing firms are among the most efficient, whereas the services sector operate at below average productivity.
“The UK productivity level is below that of other advanced economies,” Tenreyro said in London. “The silver lining is that there is scope to catch up with the frontier. How? By adopting technologies and processes that enhance productivity and are already tested and in place in other countries.”
The MPC member said that in the three decades leading up to the 2008 financial crisis Britain’s productivity grew by 2.3% a year on average, but in the decade since had slowed to 0.4% a year. The other six members of the G7 – the US, Germany, France, Italy, Canada and Japan – had output per head 18% higher on average than the UK, leaving plenty of scope for Britain to close the gap.
“The big question is the timing for that catch-up. The global economy and Europe in particular are undergoing a big investment boom, yet the UK is not part of it,” said Tenreyro.
“Why is the UK the odd one out? The likely culprit is the uncertainty regarding future EU trading relations, which many have argued, and I agree, is keeping the levels of domestic and foreign investment in the country relatively low in relation to what one would expect at this stage of the global cycle. We will have to live with some of that uncertainty for some time. And, understandably, firms will postpone some of the investments and structural changes needed to increase productivity.”
Tenreyro said she was optimistic about the long term because good institutions, a favourable location, top-class research and good human capital meant firms in the UK were well placed to be at the technological frontier.
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