December 3rd: positive signs for productivity
I have to admit that, while I’m normally an optimist, I have historically been a “productivity pessimist”. When I think about some of the reasons the UK’s productivity, and productivity growth, have been low, I don’t see a lot of fundamental shifts taking place that would change that picture in the future. The main reason is simple maths: even with the most amazing productivity growth, the people and firms in the, say, top decile cannot possibly drive up aggregate productivity all that much in the short term. [In the medium to long term, the dynamic effects can be transformative.]
The article we wrote for the Harvard Business Review goes into some more detail on both what the best firms are, and what the less-great firms are not, doing to boost productivity growth. For example, while COVID-19 has spurred businesses to invest more in automation and skills (a critical combination— one or the other is rarely enough), I worry that this may not have been the case universally. In fact, it is businesses that were already relatively digitally mature that accelerated technology adoption the most during the pandemic.
Nevertheless, I have to say that the granular investment figures, which are now available for the whole of 2020, look like good news. Granted, capital investment fell overall, but that is to be expected, not least to due to the unprecedented uncertainty brought about by the pandemic. However, gross fixed capital formation (the more formal metric we are using here) fell less in 2020 (either in absolute pounds in real terms or as a proportion of gross value added) than it did in the global financial crisis in 2008 and 2009.
Moreover, investment in intangibles — which are increasingly important in our knowledge-based economy — held up in 2020. As seen in the 3rd and 5th column of the chart, investment in software and R&D in 2020 was more or less the same as it was in 2019. That means that, as a proportion of gross value added (which declined by about 9%), capital formation in these asset types actually increased.
Clearly, this may not be enough to counteract some of the other forces (e.g., skills mismatches or changing trade patterns, let alone perturbations from inflation and associated action by central banks) that might act as a drag on UK productivity growth going forward. But it is enough for me to have become slightly more optimistic about the UK’s productivity prospects.