The story has changed, but the productivity puzzle remains Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission. You may not have noticed it, but we have had some important figures on the economy in recent days. They change the economic story of the past 20 years or so, and they have a bearing on the all-important productivity puzzle. The figures I am referring to were not the revised gross domestic product (GDP) figures for the first three months of the year, the quarterly economic accounts, though they also told us something. The first quarter is quite recent, though the second has just come to an end, and it is easy to forget how
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The story has changed, but the productivity puzzle remains
My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.
You may not have noticed it, but we have had some important figures on the economy in recent days. They change the economic story of the past 20 years or so, and they have a bearing on the all-important productivity puzzle.
The figures I am referring to were not the revised gross domestic product (GDP) figures for the first three months of the year, the quarterly economic accounts, though they also told us something. The first quarter is quite recent, though the second has just come to an end, and it is easy to forget how grim it was. The fall in GDP in the first quarter was revised down from 1.5 to 1.6 per cent, leaving it a chunky 8.8 per cent below its pre-pandemic level at the end of 2019.
Some of the individual numbers in the first quarter would have been record-breaking had it not been for the fact that even more spectacular records were set last year. Thus, restrictions led to a 4.6 per cent slump in consumer spending in the first quarter, leading to a surge in the saving ratio – gross savings as a proportion of disposable income – of 19.9 per cent, the second highest on record.
There was also a disturbingly large slump in business investment, 10.7 per cent, another second largest on record, which left it 17.3 per cent lower than before the pandemic. For a country that needs all the investment it can get, this was not good news.
If you are a glass half full person, you will see good news among the bad. The mere act of households saving less will support consumer spending, and indeed has already started to do so. Since the low point of the first quarter, which was in January, monthly GDP is already up by more than 5 per cent.
For those who see the glass as half empty, the fact that UK GDP in the first quarter was further below pre-pandemic levels than any other G7 country was troubling. There are also tentative signs, and they are only tentative, that the recovery has been losing some momentum in the past 2-3 weeks.
The debate will continue. We remain on course for a very strong growth number this year, the only question being how strong.
On which note, let me turn to the more significant official figures. The Blue Book, for those who do not know it, is the “bible” for the UK’s national accounts, produced every year by the Office for National Statistics (ONS).
In preparation for this year’s edition, the ONS has been looking back nearly a quarter of a century, and it is rather interesting. For the period 1997-2007, leading up to the financial crisis, average annual growth has been revised down from 2.9 to 2.7 per cent. This makes the period leading up to and including the crisis even more “a bust without a boom” than it was. Pre-crisis growth of 2.7 per cent was only a little above what was thought at the time to be the economy’s trend, or underlying, growth rate.
The revisions have not changed the picture of the crisis itself very much. Last year’s collapse in GDP remains nearly two and a half times the drop in the worst financial crisis year, 2009. Post-crisis growth leading up to the pandemic is now, however, slightly stronger, at 2 per cent a year on average from 2010 to 2019, up from 1.9 per cent before.
These changes have implications for productivity. The ONS now has a better picture of what is happening in the financial sector and has adjusted the figures for what it describes as “double deflation” (don’t ask). Well, if you do ask, then to quote the ONS: “Double deflation is a method for calculating value added by industry chained volume measures, which takes separate account of the differing price and volume movements of input and outputs in an industry’s production process.”
The ONS has also transformed the picture for the telecommunications sector, which on the previous measure had shown weak to declining productivity in recent years but in the new data has a big increase.
That is not true for most parts of the economy, sadly. Productivity growth in many service industries is revised down for the 20 years from 1997, only partly offset by upward revisions for manufacturing and some others. Manufacturing industry, sadly only 10 per cent of the economy, remains a key driver of productivity. For public services, incidentally, productivity was poor during the Blair-Brown years of plenty in the 2000s but improved during the austerity years. Make of that what you will.
What all this tells us is that, just as growth was weaker than previously thought before the financial crisis, so was productivity. That means that the level from which the productivity disappointment of recent years began was lower than previously thought.
To be specific, productivity growth, measured by output per hour, was 2 per cent a year over the 1997-2007 period, rather than the 2.2 per cent previously thought. So, when we compare recent performance, which is slightly stronger, against the previous trend, that previous trend is weaker than was thought.
The result is that the productivity gap – where we are compared with where we should be – is now though to be about 15.6 per cent, compared with the 19 per cent estimated before.
That sounds like better news than it is. The main reason for this, as I say, is that productivity was weaker before the financial crisis. Its growth since the crisis, while marginally better than before, is still feeble. The productivity puzzle remains.
It is indeed a puzzle. We know what the drivers of productivity are – investment, innovation, infrastructure and skills – but nothing changed after the crisis for any of these to produce the abrupt productivity slowdown we have seen, even in the new data. The statisticians need to keep digging.