Is the UK just another victim of Industrial Disease?

It was only yesterday that I pointed out that the latest business surveys for the UK were suggesting a slowing of the rate of economic growth. Tucked away on the website of the UK Office for National Statistics there was also this.

UK labour productivity as measured by output per hour fell by 1.2% from the third to the fourth calendar quarter of 2015 and was some 14% below an extrapolation based on its pre-downturn trend.

This should not have been a complete shock as hours worked were up 1.7% in the labour market report whereas GDP had risen by only 0.6% but it was very disappointing. After all we were hoping that productivity would improve as the boom continues.

There are differing ways of measuring productivity and the full set is shown below.

By contrast, output per worker and output per job were both broadly unchanged between the third and fourth quarters. On all 3 measures, labour productivity was about half a per cent higher in Quarter 4 2015 than in the same quarter of 2014.

As you can see they disagree over the latest quarter but if we look at the previous year we then get another disappointing result as productivity growth of 0.5% compares with GDP growth of 1.9% and is even below the GDP growth per head of 1.1%. Indeed if we move to the wages figures we see this in the period to the end of December.

Between October to December 2014 and October to December 2015, in nominal terms, total pay increased by 1.9%

So wage growth exceeded productivity growth too as we wonder what is really going on. If we look back we see that the productivity issue has been one which has bedevilled the credit crunch era.

Output per hour across the service sector has grown in each year since 2009 (albeit only marginally so in 2010 and 2012). By contrast, manufacturing output per hour has fallen in 3 of the 6 years since 2009 and was lower in 2015 than in 2010.

The services sector

There is a real problem here measuring output and hence even worse problems with one of its derivatives productivity. This is highlighted by the debate over the sharing or collaborative economy which the ONS defines thus.

While there is no agreed definition of the sharing economy, it is generally regarded as being activity that is facilitated by digital platforms which enable people or businesses to share property, resources, time, or skills, allowing them to ‘unlock’ previously unused or under-used assets.

The problem for measurement is that money is not always exchanged which is a clear issue for GDP which is based on market prices but nonetheless there does seem to be economic activity there.

The sharing economy is a growing market within the UK; in 2014 it was estimated to be worth £0.5 billion and is forecasted to grow to over £9 billion by 2025.

I guess AirBnB,Uber and ZipCar are the most well-known examples of this and other estimates of the economic impact are even larger.

In 2014, Nesta3 estimated that 25% of the UK adult population are sharing online in some way and Professor Diane Coyle4 estimated that 3% of the UK workforce is already providing a service through the sharing economy.

There are various issues with this but my point is ( and this is one that I made to the Bean Review of UK Economic Statistics) is that we know much less than we should about services activity. There is an obvious flaw in it being some 80% by now of our economic activity and it means that derivatives such as productivity as even less reliable. Of course when the products are intangible as most services are there are problems to begin with.

Let me remind everyone that the UK trade figures are based on quarterly and annual surveys for services. So how do they produce monthly trade and hence output figures? Well exactly…..

Manufacturing problems

This morning’s output data is not exactly in line with the season and is not especially cheerful either.

The largest contribution to the fall (in the year to February) came from manufacturing, which decreased by 1.8%. This was the largest fall since July 2013, when it fell by an equal amount.

 

This was driven by a monthly fall as shown below.

manufacturing (the largest component of production) having the largest contribution to the decrease, falling by 1.1%.

If we look back for a greater perspective we see this.

In the 3 months to February 2016, production and manufacturing were 10.6% and 6.8% respectively below their figures reached in the pre-downturn GDP peak in Quarter 1 (Jan to Mar) 2008.

Back in October last year I expressed my fears about UK manufacturing as shown in the link below.

https://notayesmanseconomics.wordpress.com/2015/10/07/the-bank-of-england-will-be-worried-about-the-uk-suffering-from-industrial-disease/

What about manufacturing productivity?

There is an issue here and we should be better at measuring it than in the service sector for the obvious reason that something and hopefully lots of products are physically produced. But yesterday’s productivity update was particularly troubling in this area.

Output per hour in manufacturing fell by 2.0% on the previous quarter and was 3.4% lower than a year earlier.

A long way from the “march of the makers” isn’t it? Well it gets worse.

By contrast, manufacturing output per hour has fallen in 3 of the 6 years since 2009 and was lower in 2015 than in 2010.

Or as the ONS summarises it.

The weakness of manufacturing productivity since 2011 has been a defining feature of the UK productivity puzzle, notwithstanding a ‘false dawn’ in 2014.

We seem to have stopped trying to increase productivity and have instead employed more people to increase output. This is good for employment levels but does help explain why there has been so little wage growth and in fact why real wages are still lower now than pre credit crunch.

Production

It has not been a good phase for UK Production either.

Total production output is estimated to have decreased by 0.5% in February 2016 compared with the same month a year ago, the largest fall since August 2013.

We already know from the numbers above that it is some 10.6% below the pre-credit crunch peak. In essence there were two factors driving the most recent fall. I have already covered manufacturing and the other was the consequence of a mild winter for electricity and gas output. You may be surprised to learn that mining and quarrying was up by 4.7% and thereby was a 0.6% upwards influence in the last year.

It is hard to see how productivity here could be rising.

The trade problem

There is an element of same as it ever was here in today’s release.

Between the 3 months to November 2015 and the 3 months to February 2016, the total trade deficit (goods and services) widened by £3.8 billion to £13.7 billion. This is the largest 3 monthly deficit since the 3 months to March 2008, when the deficit was £14.4 billion.

On and on we go month after month,year after year,decade after decade and my friend Frances Coppola has referred to this in the Financial Times. She makes a fair point here.

There is a structural trade deficit of around 2 per cent of GDP, mostly with the EU. This widened slightly in Q4 of 2015, but only back to the 2014 position.

The rest of the current account problem is mostly investment flows and returns. But I do not agree about this bit. It shpuld be true but in practice rarely is.

Since we don’t have freely floating exchange rates, the world has persistent trade imbalances. But that’s also fine, as long as capital can move freely.

Also the latest productivity figures are rather eloquent in response to this.

There is zero evidence that the economy is undergoing a terminal decline in competitiveness.

Oh and if Frances will forgive me articles in the Financial Times telling us everything is okay are one of my warning signals.

Comment

There is here an eloquent explanation of why the UK Pound £ has been falling in 2016 and we no doubt need the boost that a move equivalent yo a 1.75% cut in Bank Rate will provide. The catch is that the 2007/08 devaluation and depreciation disappointed in terms of economic impact and the poor productivity figures are unlikely to help in that so we find ourselves singing along to and in Dire Straits.

He wrote me a prescription he said ‘you are depressed
But I’m glad you came to see me to get this off your chest
Come back and see me later – next patient please
Send in another victim of Industrial Disease’

The counterpoint is that the productivity figures are almost certainly wrong as indeed are the trade figures. The catch to this is that both series and the trade figures in particular have a long time series of problems and that is much harder to argue away. Oh and whilst I am on statistical issues things like this keep happening in a world where the official numbers says that there is no inflation. From Joe Sarling.

I feel the need to vent about England rugby tickets. Cheapest tickets available for Eng v Arg on general sale? £82 per person

 

 

 

 

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18 thoughts on “Is the UK just another victim of Industrial Disease?

    • you must work for a FTSE hundred company! I run a business in the real world and no one gets anything like that!
      I do agree, however, that (as the Panama files show), there is a weird dislocation between static wages at the bottom/middle and the ever-increasing rises at the top. It is not just here, either, which is why the Trumps and Sanders of the world are so popular.
      If you think bosses are highly paid, by the way, you should try to find out what salaries are in the City, as the vast majority are:
      a) undisclosed, either because the company is privately owned or a partnership or because the directors get far less than some of the dealers etc
      b) far less deserving than CEOs of FTSE 100 companies, who at least are running big organisations!

      • I do find it difficult to understand what major decisions CEOs make which justify salaries of tens of millions. BP is in the oil business, presumably the CEO gets advice as to where they should drill, the market trends and such like. Deciding on the basis of such advice hardly seems worth £35m per annum….but nice work if you can get it!

        • alexi sayle “because they can”

          cant find the transcript of his monologue on why British managers/CEO are paid so much more than european counter parts

          his conclusion was not because they are any better,brighter or skilled or productive

          but because they can!

          Forbin

        • CEO’s are paid way way too much these days however most of them do work very hard. The justification is to add shareholder value and if they are good they can really push up the value of shares to a level where their take home pay (relatively) is a fraction of what they have achieved. A good CEO has the ability to look at a business and cut through the BS to sieze upon problems and opportunities and the good ones I have worked with are excellent at business analysis. I have also met CEO’s who sacrifice their home life to an extent we would concider unacceptable – continuous travel for several weeks at a time – even if it is 5 star. They also set the strategic direction of the business and work with senior management to make sure it is implemented and followed through. The responsibility is enormous. Having appeared to justify executive remuneration I would again stress that, like premiership footballers and most celebrities, the pay they receive is at outrageous levels. Unfortunately as block shares are owned (for a short time) by funds these days they care only about short term gain and will endorse any remuneration package if the CEO delivers. What is even more inflammatory are the rewards given to those who under achieve. There needs to be a claw back clause in executive contacts.

  1. Hi Shaun

    I wonder if the relative unresponsiveness of the BOP to the depreciation of the pound has something to do with the decline of manufacturing as a proportion of the economy.

    An older theory relating to the effects of currency depreciation, the Marshall-Lerner condition, is couched in terms of price elasticities for imports and exports. But it seems to approach the subject purely from the demand angle, not the supply side. If there is a decline in manufacturing relative to services in the export mix (reflecting a general decline in manufacturing), and manufacturing has a higher tendency to increase productivity, then the ability to change (reduce) prices is constrained. It’s not that the condition is wrong; it’s more that the decline of manufacturing has meant that it’s more difficult to respond to a currency depreciation because of the relative productivity and the secular decline in the share of manufacturing; it’s an argument from the supply side.

    Putting in another, and perhaps simpler way: has manufacturing declined to such an extent that we cannot take advantage of currency depreciation?

    • well yes , by the looks of it , like agriculture has little influence as its 2% of the economy now

      when mfg gets that low I’d posit we’re all be worse off ……

      Forbin

    • I don’t see it. The currency depreciation should boost exports even if productivity is stagnant. If productivity falls then it must out pace the currency depreciation to have detrimental effect assuming price elasticity of 1.

      Meanwhile a second boost should be derived from the more expensive imports.

      There are 2 structural problems with this though:

      1. There are many things the UK doesn’t make any more so the imports continue as the UK has no domestically produced alternative to allow substitution.

      2. As I have mentioned previously on this blog, it is my belief (although I have no evidence to back this claim up) that in this world of globalisation with long value added production chains stretching round the world a manufacture in an individual country can no longer derive much benefit from a change in exchange rate as the value that the manufacture adds to the finished product is too small to make a substantive difference to the final price, hence the price and demand for said product remains the same.

    • There is a problem with using currency devaluation to help BoT, and it is that the solution(s) is (are) arithmetic, whilst the problem is far more complex.
      Perceived quality and other prejudices are very much part of the problem. Status symbols and other social pressures also overrule small to moderate price increases with many goods.

  2. Shaun,
    Is trade surplus for Euro Zone and deficit for UK the only reason for the £ exchange devaluation ?
    I suspect race is on between IMF withdrawal from Greek Troika and Brexit result whichever comes first – Germany hoping to contain the former so UK stays and helps?

    • Hi Chris

      Over time it is clearly a factor but there are also others. For example the main central banks which are trying to ease policy at the moment are seeing stronger currencies. For example as I type this the Yen looks like it is heading towards 108 versus the US Dollar again. The Euro itself is back over 1.14. Neither the ECB nor the Bank of Japan will be happy with this.

      Let me present the recent fall in the UK Pound £ in Yen terms. It opened 2016 at 178 and is now 153……

  3. “Since we don’t have freely floating exchange rates, the world has persistent trade imbalances. But that’s also fine, as long as capital can move freely….”

    to Panama apparently

    Forbin

    • http://www.private-eye.co.uk/registry – it’s not just Panama, there are many secretive offshore jurisdictions.

      And the secrecy make a mockery of tax laws requiring people to disclose how they earned & paid tax on their wealth. Judging by the private eye map, there is huge amounts of money laundered into British property and this should be unacceptable in a first world country. If it’s morally wrong for Jimmy Carson then it is also morally wrong for David Cameron and he should resign just like the former Icelandic PM did.

  4. Shaun,
    You mention the difficulties of measuring GDP, particularly in Services.
    I have a conundrum for you:-
    I used to buy a paper every day, but have now stopped.
    I now use the internet to read many newspapers and your blog for free.
    My “productivity” has rocket upwards, instead of a cost of @£2.00 per day, I now “produce” many times more (i.e. I read several newspapers) for £0.00. ( The cost of the internet is irrelevant, as I would have it anyway).

    Does this cause a rise in GDP and productivity or a decrease?

    Regards
    Nick

    • har !

      shows GDP is not fit for purpose any more !

      I’ve always said that its tax revenues that HMG need worry about
      and not some “imputed ” GDP

      if you can impute GDP to be 100xs tax take then all those agreements set on payment as a percentage of GDP will bankrupt the country very quicky indeed !!

      Forbin

    • Hi Nick

      We are onto one of the most difficult areas to get a grip on here which is how to measure quality changes. Hedonics was one effort and I notice via the Royal Statistical Society that it is still around. Or rather efforts to measure it are…

      “Members may be interested in the attached article from a recent edition of The Economist. It reports on work done by Adobe, whose researchers have used online transaction data to produce an alternative price index. They claim to have found “that the price of computers fell by 13.1% in the year to January, almost double the 7.1% fall recorded in the [US Consumer Price Index]”, although the article does acknowledge that there may be differences in coverage. The Adobe website contains more information on the method of index construction but even that lacks detail. ”

      So far the conclusion is that they have not backed up the claim.

  5. What about manufacturing productivity?

    If you go from large scale car manufacturing to exec hand built sports saloons , aka , Maclaren ,

    then apparently because you use more workers per car = lower productivity per worker

    but they make a shed load of money off those cars

    ( also lowers unemployment )

    and also in a service economy , who or how does one mechanise a self employed hairdresser ? she/he already has all the tools out bright young things can think up …..

    if it takes one person to think of a widget and then all he needs is a machine to make it , who has the money to buy it as virtually everyone else will be out of work

    or on benefits ………..

    Seems Finlands universal credit may be the answer

    Forbin

    • Hi Forbin

      Actually Mclaren might be a good example of productivity as the value added per worked must be very high. Improving things may not be so easy though when parts are hand built. As you point out productivity in some parts of the services sector is simply unknown.

      Quite a surge in oil today nearly US $42 per barrel for Brent Crude Oil this weekend.

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