Published Wednesday 27th February 2019

Many different issues have hit the UK economy over the last few years. Brexit has been a cloud over the country, whilst topics such as the skilled labour shortage and a fall in business confidence are beginning to be felt across sectors. However, one of the most consistent threats to economic growth in the UK over the last five years has been the disappointing levels of productivity amongst UK businesses.

It is something that has become less discussed as the UK negotiates the Brexit storm. It is also likely to be one of the most challenging problems facing post-Brexit Britain. Planning ahead, businesses must look to solve this issue if they are going to compete in a global market going forward.

Does the UK Produce Less?

Figures released by the Office for National Statistics in January showed that overall labour productivity in Q3 of 2018 grew by just 0.2%. This figure is down from 1.6% in Q2 and represents the lowest growth since Q3 2016. More worrying is that the latest percentage is one-tenth of the average that was managed before the financial crash of 2008. This sudden, seemingly irreversible drop has been referred to as the UK’s “productivity puzzle”.

The figures are particularly concerning when compared to the UK’s main competitors, the G7 countries. Back in 2007, before the financial crash, the UK ranked as one of the most productive members in the group. However, in 2016, the ONS reported that UK productivity per hour was 16% below the average for G7 countries, with only Canada and Japan showing slower production. Put simply by business analysts at Bloomberg, “it [now] takes a British worker five days to produce what a French worker makes in less than four.”

This is not an issue faced solely by production businesses, either. In fact, in Q3 2018 the market sector, particularly the manufacturing industry, created strong production growth of 0.7%. The overall figure is largely down to the 1.9% decline in productivity felt by the non-market sector, including public services and charities.

The Struggling UK Labour Market

There are many reasons suggested for the UK’s production issues, but as the name suggests, it is a puzzle with no clear answer. However, certain anomalies in the current economic landscape point to potential remedies going forward.

The UK is currently experiencing the strongest levels of employability this century. From September to November last year, the employability rate was 75.8%, the highest figure since comparable ONS records began in 1971. Whilst Government officials proclaim this as a positive, many analysts have seen concerns inside these figures, particularly the increasing number of low-paid and low-skilled employments. These jobs traditionally suffer from reduced productivity and are likely to be causing a drag on overall statistics.

Another undeniable impact on UK productivity has been felt through Brexit, beyond the negotiations being a distraction for domestic policy. Future trading uncertainty has seen economic confidence fall, with business investment consistently declining over the last year. Faced with short-term uncertainty, many businesses have chosen to postpone investments in technology that would help boost productivity. Instead, companies are employing more low-skilled, temporary staff, leading to a rise in employment and a fall for overall productivity figures.

A Rapidly Changing Business Landscape

However, many major businesses will be forced to change tactics if the current economic picture continues to develop. In October last year, average weekly earnings rose by 3.3% on the previous year. It was the biggest labour cost increase in over ten years and was higher than all analysts expected. Whilst many experts noted that the jump could prove to be an anomaly, it’s enough to cause the Bank of England to consider raising interest rates, and many businesses will also have to evaluate their strategies going forward.

With Brexit seemingly on the horizon, businesses are now in a position where they must evaluate their labour/technology balance heading into the year. At ERA, we specialise in helping major UK businesses reduce their expenses through effective procurement strategies. Our specialists can show you how to reduce payroll costs long-term, helping to grow your profit margins as we head into a potentially turbulent economic period. With expertise across a range of cost areas, speak to our team today and see how we can help improve your profitability today.