UK productivity increase – reason to celebrate or a red herring?

Optimists were given reason to celebrate recently when reported rates of UK productivity in 2017 showed some improvement after years in the doldrums, but economists then seemingly spoiled the party by warning that UK businesses still lag behind much of Europe – and that the stats may not be quite as positive as they seem.

A glass half full

Labour productivity rose by 0.7 per cent in the three months to December 2017 – the second consecutive quarter for positive growth – and, according to the Office for National Statistics(ONS), together the two periods showed the strongest growth rate seen since the second half of 2005.

Responding to the data released in February 2018, Liz Martins, senior economist at HSBC, told the BBCthat she expected the unemployment rate to continue to rise but that rising numbers out of work could be part of the explanation for increased productivity growth.

“If GDP is growing more than the number of people working in it, then productivity will grow as there is more growth per head. It’s not the nicest way to get productivity but it is effective as long as GDP growth doesn’t slow too,” she said.

A glass half empty

Other economists have warned that the increase in productivity may be due to falling numbers of hours worked rather than because companies have substantially boosted their economic output.

A lack of productivity is a threat to UK businesses. The ONS says the productivity of British workers still remains well below the rates that could have been achieved had productivity growth continued at its pre-downturn rate. The Guardianhas also pointed out that the rate of increase in worker efficiency for last year as a whole still languished below its pre-crisis levels following a weak start.

The UK’s labour productivity is currently around 16.3 per cent below the average for the other G7 economies. ONS analysis using new labour productivity data on an industry-by-region basis suggests that London’s financial industry and several regional manufacturing industries account for much of the recent slowdown of productivity growth, relative to the five years prior to the economic downturn. The productivity of UK public services increased by just 0.4 per cent in the final quarter of 2017, only partially offsetting falls in productivity in the first half of the year, and resulting in the first annual fall in public service productivity since 2009.

Turning the upturn into an ongoing trend

So while the news may not sound great overall and some of the explanations for the recent upturn may not be entirely positive, there are lots of actions that UK businesses can take to ensure the recent improvement is sustained and isn’t consigned to history as simply a ‘blip’.

When a ‘productivity flash estimate’ was released by the ONS in November 2017, Tony Danker, chief executive of the government-backed Productivity Leadership Group, said: “We have ten years of flat-lining productivity to recover from, so let’s hope this can be the beginning of the journey back to growth. Addressing this challenge creates a major opportunity for the economy and is critical for the UK to keep up with its competitors.

“Businesses are at the heart of the solution. It’s critical that companies up and down the country now embark on a major productivity push, learning from the best and introducing management tools and technologies that have been proven to drive success.”

In an interview with the Chartered Management Institute (CMI)in April, Sir Charlie Mayfield, chairman of the John Lewis Partnership and of the Productivity Leadership Group, agreed that businesses can make a difference, saying: “There are a variety of reasons for the UK’s relatively poor performance in productivity. But one of the major reasons is the quality of leadership and management… Research shows that greater adoption of relatively commonplace practices would make a huge difference.”

Risk managers can help organisations identify key areas for improvement. For example, Sir Charlie points first to performancemanagement and simple actions such as setting targets, thinking about what success looks like, identifying what contribution people can make towards achieving that success,and then helping them understand the extent to which they’ve achieved it. This includes both praising good performance and dealing with underperformance.

Sir Charlie also underlines the importance of paying attention to your competitors and of having an external view of your business, as spending time looking at what other people are doing is strongly correlated with higher productivity.

Be the best business you can be

Sir Charlie is also a member of the ‘Be the Business’advisory board, which is spearheading a business-led campaign, supported by leading UK businesses, to help companies improve their productivity.

The group has developed tools including a benchmarking feature that helps companies see how they compare to the competition and measure up to best practice, with the aim of helping them compete better in the world and be the best they can be.

In reality it comes down to this – businesses need to invest in their futures – whether that includes increased digitisation or other new ways of working, or improved processes and management techniques, to help maximise the output of their human resources, so we can all grow together.

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