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…..
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.
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.
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.
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