Belfast Telegraph

UK's lack of productivity growth is a big concern

By Hamish McRae

Let's start with a puzzle. If the UK economy was shrinking during the first three months of this year, how is it that between February and April it added a net 166,000 jobs?

Now try another puzzle. If economic activity is still 4% lower than it was in early 2008, how come the total number of people in employment is fewer than 300,000 lower than it was then - 29.28m against 29.57m in March-May 2008?

There are three possible explanations. One is that the employment figures are wrong; another is that the output figures are wrong; and the third is that there has been a continuing fall in productivity, of output per person.

The first is unlikely because employment records are pretty good. While some increase in employment has been self-employment and that may not be entirely voluntary - people who are made redundant setting up on their own - presumably these people are finding some work.

The second seems to me to be most of the explanation: that we are under-recording output and that, far from shrinking, the UK economy, after a dip last summer, is growing again albeit slowly. But there is probably something of the third explanation. While it would be astounding were productivity to be falling, for that would be a reversal of a 200-year trend, for output per person to increase in the UK by close to 2% a year, it may not be increasing very fast. That raises big questions about future prosperity.

In the past couple of weeks there have been disturbing signs that what is happening in the eurozone has started to undermine confidence here. It does not seem to have damaged consumer confidence but it has certainly undermined business confidence. That concern was behind the new Bank of England plan to dish out money to the banks for boosting lending to companies, which went into action yesterday. As we can see from the new minutes of the Monetary Policy Committee, the Bank may well vote for more quantitative easing next month. Sir Mervyn King is primus inter pares on the committee but the fact that he has swung in favour of more QE is a pointer to the way the Bank is likely to move, particularly should the eurozone economy move into a serious recession. British companies are shifting exporting effort away from Europe not for any ideological reason but simply because this market is a slow growth one. But for the time being export demand does depend on Europe and there is no quick escape from that.

Meanwhile there is a longer-term issue: productivity. As there is no significant growth here. This suggests that companies have been flexible in keeping staff on during the downturn, which is one of the main reasons why unemployment did not rise to the dire levels in some of the forecasts. But it raises troubling questions about the long-term growth potential of the economy. If the UK cannot grow at somewhere between 2% and 2.5%, the projections for cutting the debt have to be reworked. The aim for this parliament is merely to stop the debt growing. During the next parliament we have make a start on trying to get it down.

This is not just about debt, though. It is also about living standards. Somehow we have to restart the great engine that increases living standards. The fact that we are not increasing productivity is a real worry in the long term.