The Ascento Blog

Productivity growth is slowing as Brexit bites

[fa icon="calendar"] Jun 19, 2019 1:00:00 PM / by Simon Taylor   

Simon Taylor

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Economists regard productivity gains as the most important driver of rising living standards over the long term. However there are ongoing fears that Brexit will be sapping the strength of the UK economy over the next decade. A key measure of growth in the economy is 'output per hour of work' and this slumped in 2018 according to the figures, as the UK managed only a quarter of the rate of productivity growth seen before the financial crisis.

Productivity grew by 0.5% last year compared with 2017, well below the 2% a year average recorded before the 2008 crash. Productivity gains are linked to investments in the economy, but Brexit has led to corporate spending and investment falling dramatically. Economists fear that current lower levels of business investment will mean weaker levels of productivity growth in future, paving the way for lower GDP growth and sluggish pay rises for workers.

There is always a time lag effect with this, as a lack of investment now takes time to work its way through the spending and investment economic cycle, to then hit home later down the line as slower rates of production due to a decline in orders placed etc.

Initially, this has a minimum effect on individuals within the economy, but later as the economy begins to stagnate or even decline again, our standards of living are hit by rising prices through inflation and lower wage increases year on year. 

The entire Brexit issue has generated the most economically and socially uncertain period since the interwar years of 1918 to 1945. Whilst the post WWI economy rose from the ashes of the killing fields in Flanders, and women drove the increases in economic output, the uncertainty created by the Weimar Republic (1913-1918) and the right-wing economic machine that was then branded the ‘Nazi Machine’ that came out of the Treaty of Versaille created socially and economically uncertain times for the UK as many felt the effects of post-war effort and the fear of pre-war WWII concerns.

Uncertainty is the root of all economic reasons for ‘stagnation’. Recent Q1 rises across the economic indicators, as reported in all the media a few weeks ago, whilst out of the Brexit context look amazing, with the Brexit context applied are extremely concerning as these are widely assumed to be caused by the ‘stockpiling’ effect of the weeks running up to 29th March 2019, the date the UK was supposed to cut the chord with European Economic Union. These positive figures are also in part fuelled by the political uncertainty that also surrounds the Brexit process. Or, in another way, we ‘Fiddle whilst Rome Burns’ and carry on doing what we need to do to survive.

Measuring productivity growth

Measured productivity is the ratio of a measure of total outputs to a measure of inputs used in the production of goods and services. Labour productivity (LP), which measures the growth in value-added output per unit of labour used is perhaps a better measure of the longer-term corporate investment or a lack of it due to uncertainty. I will explain why;

Corporate investment tends to be divided into two categories, short term and long term. Short term investment is likely to be in plant and machinery that will provide a return on investment much faster than investment in labour and labour skills development. Investment in labour skills and development is a longer-term time commitment investment that is measured in the value-added output per unit of labour used.

Upskilling your workforce to be better at and more efficient at what they do is not an immediate return but is a long term outcome of spending decisions in training and development that should bring about an increasingly productive efficient workforce (hence the apprenticeship levy). However, the lag effect of this materialising is long and too often short term investment return ‘trumps’ longer term gains. Putting this another way; short term investment in plant and machinery is a tactic to win a battle. Long term investment in people, skills, knowledge and understanding is a strategy to win the war.

The overall problem that is created by the intangibility of economic uncertainty and the other one of consumer confidence, is decision making becomes short term, thus creating a lack of longer-term investment in people, these being the only way you can drive up productivity in the long term. And so the negative cycle continues.

 

About Ascento

Ascento learning and development specialise in providing workforce development apprenticeship programmes to both apprenticeship levy paying employers and non levy employers. We work closely with employers to identify the key areas for development and design  strategic solutions to tackle these with programmes that are tailored to each individual learner. With two schools of excellence focusing on Management and Digital Marketing we don’t deliver every qualification under the sun, but focus on what we know best and ensure that quality is at the heart of everything we do.

Simon Taylor

Written by Simon Taylor

Ascento L5 Management Tutor.