The developed world’s economy is still staggering shakily after the credit bubble burst in 2008, all the indicators are flat-lining or falling; GDP growth is poor, liquidity is tight, employment is falling and real interest rates are negative, but above all productivity is the problem. Productivity is a calculation that takes constant price GDP per hour worked and per worker or all GDP divided by the average number of people in work in the year and divided again by the average number of hours worked. The charts express this as an index based at 100 in 2007.
For the UK big question though is not the incremental issue of whether we are counting the numbers correctly it’s our ability to compete with the more agile, younger economies in the developing world. In the UK the only industry that can compete on this global stage is our financial service industry and this has been badly shaken and in now being regulated to death by US and European politicians who know nothing about finance. We need to protect this industry with all our strength and find one or two other winners where we have a solid foundation – defence / aerospace, Pharmaceuticals / health and digital marketing might be candidates. What is lacking is an industrial policy and the structural reforms and programmes that are needed to under-pin are economic future, if we can get that right productivity will look after itself.Prior to 2006 the G7 had been able to rely on gradual improving productivity except in the UK and the US where gains were more rapid. These significant improvements were a function of our investment banking boom and a more agile ‘Anglo Saxon’ business model.
Indices based at 100 in 2007
Since 2007 the G7 has had a combined productivity increase of about 0.5% annually and it’s this statistic that has got the economists and politicians worried. One would expect productivity to decline in the aftermath of a financial crisis and at the start of a recession as demand drops quicker than the cost saving adjustment businesses need to make (lay-off staff), but normally it recovers very quickly as business have to do more with less.
The horror show since Lehman Brother collapse