Merryn's Blog

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520591/are-uk-house-prices-really-on-the-rebound
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020