Whenever British business people get together to discuss the key challenges facing the UK economy, it is the number one topic of conversation, apart from Brexit: just how does Britain improve its woeful productivity record?
The problem is well documented and best summed up in one stark fact – it takes the average British worker five days to produce what the average French worker does in four days and what the average German worker does in three and a half days.
Unfortunately, according to the latest data, the challenge appears to be getting harder.
The Office for National Statistics has reported that productivity fell during the first three months of the year.
It was the first such quarterly drop since the final three months of 2015.
Productivity, as measured by output per hour, fell by 0.5% from January to March.
The ONS said this takes productivity back below the pre-crisis peak that was achieved in the final three months of 2007.
In other words, the economy is now less productive than it was just before the financial crisis.
Philip Wales, head of productivity at the ONS, said: “UK labour productivity growth has struggled since the 2008 economic downturn and the fall in the first quarter of 2017 brings to an end a recent run of quarters of positive growth.”
This weak record in productivity impacts everything, ultimately.
The ONS noted that, had productivity continued to improve in line with the trend seen before the downturn, it would be 20.2% higher than it presently is.
Greater productivity means better economic growth and stronger economic growth means a higher tax yield, bringing down the deficit more quickly, allowing the government to spend more on public services.
So the productivity crisis is a big deal.
Image: Output per hour in the services sector fell
What will worry ministers almost as much are the sectoral and regional breakdowns provided by the ONS.
It reports that in the manufacturing sector, output per hour actually improved by 0.2% during the quarter.
However, in the services sector, output per hour fell by 0.6%.
This has a bigger impact overall because the services sector accounts for around four-fifths of all UK economic activity.
On a more encouraging front, productivity in the public sector was 3% higher in 2016 than in 2010, suggesting that the public sector has become more efficient in the face of spending cuts in some sectors.
The regional and industry differences present a mixed picture.
London and the South East remain the most productive parts of the UK, thanks to the high levels of financial services activity there, a factor that has helped make Scotland more productive than some other parts of the UK economy.
The North East of England, a region long associated with industrial stagnation, also scores relatively highly thanks to high levels of what the ONS calls “non-manufacturing production”.
But other parts of the economy, notably Wales and Northern Ireland, score poorly.
Mr Wales added: “The…statistics that ONS releases today…reveal striking differences in productivity in different industries and regions.
“In 2015, output per hour worked in London’s financial and insurance industries was around seven times higher than in the lowest productivity regional industries.”
Image: London was among the most productive parts of the UK thanks to financial services activity
Improving productivity will not be easy. Boosting Britain’s skills base will be essential, as will more investment by businesses.
Yet, as Mike Cherry, the national chairman of the Federation of Small Businesses, notes, two-thirds of small firms are not planning to increase capital investment during the next three months.
He went on: “One in seven are planning to decrease investment levels.
“No doubt some are delaying decisions as they wait for further clarity on the implications of Brexit.”
Ironically, if productivity ever does improve in Britain, it may be at the cost of a rise in unemployment.
Economists have long suspected that Britain’s inferior productivity record, compared with the likes of France and Germany, is because the latter prefer to have their least productive workers on the dole rather than in employment.
In Britain, by contrast, the jobless rate is substantially lower because even the least productive workers are employed.
Source: SKY News