Why productivity won't recover to pre-crisis levels

Productivity in Britain has fallen dramatically from the levels it hit in 2007/08. And it won't be bouncing back, says Merryn Somerset Webb.

A few weeks ago we speculated here that one of the main reasons for Britain's falling productivity was the decline in the number of people employed in the financial sector.

Whether you approve of its particular brand of productivity or not, we said, people who work in the City are, statistically speaking at least, highly productive. In plain GDP terms, one investment banker operating in a good environment is many times as productive as, say, a car plant worker.

At the moment, City activity is, on some measures at least, at a ten-year low. Look at it like that, and it makes sense that productivity is also low we are employing more people, but they are producing less.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

When we wrote this we didn't have any evidence for it it just seemed like a reasonable explanation. So it was good to see City AM's Allister Heath referring to a new paper out from Douglas McWilliams of the CEBR in his editor's letter. You can read the whole paper here: We should not get so worried about the productivity shortfall.

The key point (to me at least) is that "in some sectors, especially financial services, measured productivity in 2007/8 gave a misleadingly high estimate for productivity since it reflected an unsustainable position (often for example including as output profits that subsequently not only had to be written off but had to be offset by huge provisions)."

So a "significant" part of the explanation for the apparent fall in productivity growth is that the fast growth from 1997 to 2007/8 (2.2% a year) was too good to be true. It reflected not real sustainable GDP growth but froth; froth that is now being "squeezed out" as we deleverage and the City normalises.

The good news? Economists can now stop fretting about why productivity is falling McWilliams appears to have nailed it. The bad? We can't expect an automatic "bounce back" to 2008 levels of productivity to make everything ok.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.