It is called the most important of all economic indicators and according to recent data, it’s flashing green for GO. If it can stay like that, then this is good news indeed, including for UK equities. But can it stay like that?
Some good news on UK plc, if it can continue then it’s a game changer
The Nobel Prize winner Paul Krugman once said: “Productivity isn’t everything, but it is almost everything.” But for too long, productivity growth in the UK has been abysmal.
In fact, ever since 2007, it has been bad across the developed world. But for the UK it has been especially bad.
Economic output is a function of how many hours are worked and output per hour. Since UK unemployment is at 4.3 per cent and employment has been passing new record highs for some time, there is very little scope to eke out more growth by increasing employment, which means the UK needs to increase output per hour.
According to the ONS, if UK productivity growth had continued to grow at the pre-2007 rate, then right now, the UK economy would be around 19 per cent bigger. If that had happened, tax receipts would be 19 per cent higher, the government could have spent billions more on the NHS, education, welfare and decreased taxes while cutting public debt at the same time. Wages would have been around 19 per cent greater, meaning consumer sectors of the UK economy would have been booming, retail stocks would be much more valuable, Tesco, for example, may never have experienced a crisis.
By contrast, if the rest of the G7 had seen productivity growth continue at the pre-2007 rate, today, all else being equal, it would have been around 10 per cent bigger.
Good or bad
As it happens, there is an argument to suggest that the odd crisis is a good thing, it enables the economy to reset - but usually, in the years after a crash, we see growth accelerate to a higher than normal rate, making up for lost ground. This did not happen this time.
The second half of 2017
In the third quarter of 2017, UK output per hour grew by one per cent (quarter on quarter) and by 0.7 per cent in Q4. If that growth rate can be maintained, it would be good news indeed, good news for the NHS, wages and equities.
But the question is, can it continue?
Some economists have been dismissive of the data saying that growth in output per hour was a side-effect of a one-off fall in the hours worked. Maybe they are right, but the jump in productivity was impressive, all the same.
Best of both worlds
What we really want is for unemployment to remain low whilst productivity grows. And if hours worked fall a tad, providing they fall at a slower rate than output per hour rises, that would be a good thing.
The mystery that isn’t a mystery
The real puzzle for me though is not why did productivity growth jump at the end of 2017, but why it fell so far in the first place?
Professor Robert Gordon of North Western University near Chicago puts it all down to a slowing rate of innovation.
I am not sure if they put something in the grass near Lake Michigan, but I just can’t get my head around Robert Gordon’s theory.
But even if he is right to say innovation has slowed down recently, he is surely wrong moving forwards. Automation should transform productivity. The jury is out, of course, on whether automation will also destroy jobs. My own view is that the economy is a complicated beast, for it to grow, it needs two things to happen in tandem: innovation and growing demand.
We know from the experience of the US in 1930s and the wider experience post-2008, that growing demand is not a given, and can need the government to help it along with stimulus.
But that is a story for another day, for today we can bask in some rare good news and hope it continues.