Sunday, August 08, 2021
Northern productivity powers up - but can it last?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

I am going to start today with a prediction. It is that when we get the next official estimate of productivity growth, it will be a strong one. Let me explain. The main measure of productivity is output, or gross domestic product (GDP), per hour worked. The next GDP figure we will get is for the second quarter and, in line with the opening up of the economy, expectations are for a rise of 5 per cent or so compared with the depressed first quarter.

The question then becomes what has happened to hours worked. On this, we know roughly where things are heading. In the March-May period, hours worked were 2.4 per cent up on the previous three months. A similar figure for the second quarter as a whole would tell us that GDP rose at more than twice the rate as hours worked. It would translate into something like a 2.5 per cent rise in productivity in the quarter.

That may not mean much to you but, given that in recent years productivity has struggled to grow by more than 0.5 per cent a year, it would suggest that the post-pandemic recovery - if calling it that does not jinx it – has got off to a good start. I will come on in a moment to whether it can be sustained. We will get the figures on August 17. If I am right, you read it here first. If not, there is plenty of time to expunge it from the memory.

I mention productivity because we have just had some interesting new figures on it from the Office for National Statistics (ONS). The new figures reveal what happened to productivity in 2020, the year the coronavirus struck.

The backdrop to this is that if you wanted the clearest evidence of a North-South divide in the UK, productivity is the place to look. Before the pandemic, in 2019, output per hour in London was 32.8 per cent above the national average, followed by the southeast, 8.2 per cent above the average. Every other region or nation was below the UK average and only Scotland, 1.2 per cent, below that average, broke southern dominance.

So the East of England was 5.1 per cent below the UK benchmark and the southwest 9.1 per cent below. Thereafter, it fell away quite quickly, with Northern Ireland the worst performer (80.4 per cent of the UK average) and no other region above 89 per cent.

As has been pointed out many times, if you could increase the productivity performance of the worst performing regions to match the best, the UK would not have a productivity problem. This is what makes the 2020 figures interesting.

The region with the strongest productivity growth last year, 4.6 per cent, was the northwest of England, followed by Northern Ireland, 3.5 per cent. Only then came “the South” – London, the southeast, eastern England and the southwest, followed by a more familiar line-up. Weakest last year was the West Midlands, with a 1.4 per cent drop in output per hour. By my calculations, the northwest’s better performance last year was enough to nudge its productivity levels above those of the southwest, putting a northern cat among the southern pigeons.

Last year was a difficult on for collecting statistics, with working from home and other changes, but what appears to have driven the better performance of the northwest, which includes major cities like Manchester and Liverpool, was the greater resilience of its economy. The northwest’s GDP fell by 7.9 per cent last year, less than the national average, with only London experiencing a smaller fall, 7.1 per cent. In contrast, the East Midlands suffered a 10 per cent slump, the northeast 10.3 per cent and the West Midlands a huge 13 per cent.

Explaining this is quite difficult. The northwest suffered more enduring Covid restrictions than many other regions, while the London story is difficult to square, on the face of it, with the huge drop in activity in the centre of the city, though maybe the diversified London economy was better able to adapt to working from home.

Even a couple of swallows do not make a summer, so the prospects of a good second quarter national reading for productivity will not mean that we have turned a corner. Neither does last year’s productivity bounce in the northwest tell us that the northern powerhouse initiative, initially focused on the region, has paid off. It is, as they say, too early to say.

There is work to be done to raise productivity and an interesting new Institute for Government paper from Giles Wilkes, a former adviser to Vince Cable when he was business secretary, and to Theresa May’s Downing Street, has some interesting thoughts.

After a week in which Boris Johnson and Rishi Sunak have written to pensions funds and other long-term investors urging them to increase their investment in Britain, including in infrastructure – something that George Osborne tried unsuccessfully – Wilkes makes two essential points.

The first is that a focus by government on high-value sectors and on technology, something prime ministers have been obsessed by since Harold Wilson talked of its “white heat” in the 1960s, will not work. Nor will a “batting average” approach, reducing the economic contribution of lower-productivity services, work. The UK’s productivity malaise came long after the decline in manufacturing’s share in the economy. The need is for a range of actions, across the whole economy.

As he writes: “Productivity is not a problem that can be solved with a laser focus on the right, high-technology sectors: if the aim is to help the bulk of the economy, efforts need to be much broader. Problems including weak management practices, slow adoption of technology, a lack of skilled staff, patchy infrastructure and access to finance need to be addressed across the economy, not just the cutting-edge parts.”

Wilkes’s other main point is one that is often ignored; the role of demand in driving up productivity growth. The weakness of productivity growth since the financial crisis has been against a backdrop of weaker overall economic growth. In the 60 years to 2008, UK GDP growth averaged 2.8 per cent a year. From 2010 to 2019, inclusive, it was 1.8 per cent, and even weaker after the 2016 Brexit referendum.

“The state of aggregate demand is one variable that might be overlooked,” he writes. “A broad productivity crisis hit many developed countries at the same time as the financial crisis damaged global demand and confidence.” We are there still, and we need to break out of it.