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UK productivity saw a substantial pick-up quarter-on-quarter in Q3 2020 following declines in Q1 and Q2, as economic activity rebounded and rose significantly more than hours worked

However, performance has been distorted by COVID-19-related restrictions, and Q3’s rebound does not fundamentally change a weak underlying productivity trend. Output per hour rose 5.6% q/q and 4.0% year-on-year (y/y) in Q3 2020, the largest annual increase since Q4 2005. Output per worker grew 16.6% q/q in Q3, but was down 7.9% y/y in Q3 2020. This was the second largest annual fall since records began in 1959 and reflects the fact that the Coronavirus Job Retention Scheme has reduced hours worked, but preserved workers’ employment statuses

A risk is that the effects of COVID-19 on the UK economy over 2020 have a lasting negative impact on productivity and growth potential. Business investment remains weak. There is the risk – especially given uncertainties stemming from the recent rise in COVID-19 cases – that companies remain cautious for an extended period in new investments

Productivity may also be affected by businesses having to invest to make their premises compatible with social distancing requirements rather than investing in new equipment and productive practices. Increased working at home may have mixed implications for productivity. On the positive side, the time saved commuting may be lifting output for many workers. However, productivity may be affected by reduced social interaction and the building-up of experience from people being in the office

The hope is that a successful vaccine roll-out over the coming months fuels a boost to business confidence and willingness to invest, with favourable implications for productivity Part of the UK’s recent disappointing labour productivity performance has been that – where possible, and given an uncertain economic and political outlook – some companies have preferred to take on labour rather than commit to costly and difficult-to-reverse investment. Other factors include the fact many new jobs have been in low-skilled, low-paid sectors, while some have argued the UK has been poor at transferring technology and know-how across the economy.

Howard Archer, chief economic advisor to the EY ITEM Club, comments: “UK productivity – measured in terms of output per hour worked – increased in the third quarter of 2020 after falling in the second quarter as it rose 5.6% quarter-on-quarter, according to the Office for National Statistics (ONS). This followed declines of 0.7% quarter-on-quarter in the second quarter and 1.1% quarter-on-quarter in the first quarter.

“Output per hour worked was up 4.0% year-on-year in the third quarter of 2020 after a fall of 1.0% in the second. The ONS said that quarterly movements in productivity measures can be erratic so year-on-year rates gives a better indication of trend. Output per hour worked rose 3.0% year-on-year in the third quarter of 2020 as gross value added (GVA) fell at a reduced rate of 9.5% while hours worked were down 12.1%.

“The ONS observed that “increase in output per hour at the whole economy level was driven by a decrease in hours in less productive industries, creating a positive ‘allocation’ effect as more productive industries now represent a larger share of the economy.”

Howard Arched continues: “Output per worker rose 16.6% quarter-on-quarter in the third quarter but was still down 7.9% year-on-year. This followed a record decline of 17.9% quarter-on-quarter and 20.5% year-on-year in the second quarter. There was an earlier fall of 3.2% quarter-on-quarter and 3.3% year-on-year in the first quarter. The ONS has reported that the “disparity between two measures (output per hour worked and output per worker) that are usually closely aligned is because of the government’s furlough schemes.”

“Consequently, the ONS pointed out that in the third quarter: “When compared with the same quarter a year ago, employment has decreased by 0.8%. Alongside these changes in the labour market, there has been an accompanying 8.6% reduction in gross value added (GVA) when compared with the same quarter a year ago, the second largest drop in history.””

Howard Archer continues: “While welcome, the rebound in productivity in the third quarter 2020 does not fundamentally change what is still a weak underlying trend. The UK’s productivity performance has recently been significantly affected by COVID-19, and the flat overall productivity performance over 2019 after an underwhelming 2018 extends the UK’s overall poor productivity record since the 2008/9 recession.”

Howard Archer comments: “COVID-19’s impact on the UK economy over 2020 has had a significant negative impact on productivity and UK growth potential. This is reinforced by the current challenge posed to economic activity by new COVID-19 cases. “In particular, business investment has been pared back and there is the risk that companies will be cautious for an extended period in new investments.

“Productivity may also have been affected by businesses having to invest to make their premises compatible with social distancing requirements rather than using the resources to invest in new equipment and productive practices.

“Increased working at home may well be having mixed implications for productivity. On the positive side, the time saved commuting may be lifting output for many workers. On the negative side, productivity may be affected by reduced social interaction and the building-up of experience from people being in the office.

“The hope is that the successful roll-out of the COVID-19 vaccines over the coming months fuels a significant boost to business confidence and willingness to invest, with favourable implications for productivity.”

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