UK has had a poor track record on productivity for some time

In the midst of the race to become the new leader of the UK Conservative Party, and prime minister, one candidate, Liz Truss has been rather setback by some historical remarks she made suggesting that British workers needed “more graft”. Seemingly labelling workers as lazy when trying to convince the Party, and the country, that she’s the right person for the job might not cost her the leadership election. But is it fair and, if it is, does it imperil UK assets such as equities and the pound?

We noted a few weeks ago the comment by US economist Paul Krugman that “productivity isn’t everything, but in the long run it is nearly everything”. The UK’s productivity record has been poor, and that’s what Ms. Liz Truss was presumably referring to in her comments that workers needed more graft. But productivity is not just a case of working harder. It is certainly not a case of working longer either as data shows that workers in the UK have longer working weeks than some of their supposedly more productive peers, such as Germany.

Output produced is a consequence of labour and capital working together and if the latter is relatively poor, it does not matter how hard workers work, their productivity is going to be relatively weak. Those who work the longest, for instance, often have the poorest capital to work with. A different measure that’s often used to get a better sense of things is total factor productivity. This measures the increase in output that’s independent of any increase in labour or capital inputs.

Here too the UK’s record is not great but the interesting thing about the past few years, at least, is that the laggards have been countries such as Germany and France, not the UK. The US has performed better but a key thing to remember right now when we talk about productivity is that it is pretty poor across the developed countries, so even those that are doing well are hardly shooting the lights out.

In fact, if we take the US, data shows that productivity fell 4.6% at an annualised rate in Q1 of this year, and that after a 7.4% slump in Q1. In the UK, output per hour worked fell by around 2.5% in annualised terms in Q1 and was flat in Q2. However, as we said earlier, the real laggards in terms of productivity have been in mainland Europe, such as Germany and France.

In short, what we would say is happening is that the UK has had a poor track record on productivity for some time – but now others are regressing towards UK-like productivity performance. This could prove temporary, and the UK’s relative underperformance could start to show through again. Just whether this happens or not could depend on the depth of what seems to be a looming recession in the UK and elsewhere and, particularly, the impact this may have on the tightness of the labour market.

Mr. Steve Barrow, Head of Standard Bank G10 Strateg suspicions that the tightness of the labour market in the UK and elsewhere is causing firms to hoard – unproductive – labour because they fear that new workers cannot be hired, or will cost too much, when economic recovery returns. Many countries are experiencing very tight labour markets and, as this is probably reflected in generally weak productivity performance. In time, if the recessions prove so deep that firms have to stop hoarding labour, we may find that productivity will recover.

In theory, this could mean that those with the deepest recessions will see productivity recover the most and this, ironically, could give asset prices a lift. But much also depends on whether recessions dampen investment significantly as weak investment could depress what’s called capital deepening, or the amount of capital that workers have at their disposal. And this, in turn, could lower productivity.

“Clearly, we’ve barely scraped the surface of this crucially important issue but the evidence right now actually seems to be that the UK “problem” lies more in the allocation of capital rather than “lazy” workers. It also seems that all countries are suffering and some that have performed far better than the UK in the past are actually doing much worse now and hence the case for this issue to weigh on the pound or relative equity performance actually seems to be a pretty weak one”, said Mr. Steve Barrow.