Sarah Glendinning: Productivity growth remains the tough nut to crack

The assistant regional director of the CBI says that weak productivity growth is one of the key challenges facing the UK economy

Sarah Glendinning, assistant director, CBI North East
Sarah Glendinning, assistant director, CBI North East

The Monetary Policy Committee’s first view of the economy after the election shows a positive outlook for UK growth, but productivity growth remains the tough nut to crack.

Last week, the Bank of England published its quarterly Inflation Report. Like most forecasters, the Bank has been continually disappointed by the weakness in productivity growth, yet it expects it to improve over the next three years.

Ben Broadbent, the Bank’s deputy governor, probably hit the nail on the head: first, we need to look at productivity growth over the past 100 years, not just the last six or seven years. From that point of view, we can be confident that productivity growth will pick up from its current doldrums.

Second, financial crises, fortunately, are beasts that rarely rear their heads but they tend to have a dramatic impact on productivity growth in their aftermath. Understood in that context, the UK’s experience over the past few years is not so unusual, and should improve as the recovery moves ahead.

Productivity in the North East (GVA per hour) is lower than the UK average. But it’s not all bad news, as we‘ve made up some ground and started to close that gap over the course of the recession.

There are fallouts from the financial crisis – weak investment growth has weighed on the contribution of capital and we’ve bought fewer machines than we normally would – which make all of us a bit less productive in how we work.

But this should change as the effect of business investment growth picking up in the second half of 2013 and last year begins to be felt. It’s crucial that we keep investment growth going, all the more so as the UK remains below its international competitors in the amount we invest. That’s why the CBI has called on the Chancellor to commit to continuing the Annual Investment Allowance at the right level to encourage firms to invest in the UK.

Job creation is one of the success stories of this recovery and the added challenge for the North East is getting people back into work whilst continuing to make progress on productivity. Although many of those finding work recently are new to their roles, which weighs on average productivity growth to start with, they will pick up speed as they learn on the job and find their feet.

Our members also tell us there are persistent skill shortages, particularly in IT and engineering. As we see more jobs created in these sectors, our productivity growth will naturally start to rise.

Finally, to really take the lead in raising productivity, companies need to share their management experience, and design jobs well, as we set out in our Better of Britain report.

So, perhaps the Bank of England is right after all to expect productivity growth to finally pick up.

But there’s no doubt it’s the biggest economic challenge for the UK right now, so we’ll all have to watch closely.

Sarah Glendinning

Assistant regional director - North East

CBI

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