The UK economy faces a large hurdle. To enjoy sustained growth an economy needs growth in productivity. Compared to the rest of the G7, with the exception of Japan, productivity in the UK is lousy. There was good news yesterday, but if the UK can better embrace entrepreneurs, the news can be better still.
Economics Nobel Laureate, Paul Krugman once said that productivity isn’t everything, but it is almost everything.
He is right, in the long run, the only way an economy can see its GDP per capita rise is if output per capita rises.
In recent years, the UK has scored over many of its rivals in one key way: its unemployment level was quite low – less than half the rate in France, for example. But France and most of the rest of the G7 scored over the UK in another way, output per hour worked was, and indeed is, much higher.
In fact, across the G7, only in Japan is output per hour lower than in the UK.
There are many theories as to why this is the case. But it does appear that the UK has seen insufficient investment from both companies and the government. It also suffered a severe knock to the highly productive financial services sector after 2008, from which it has not fully recovered. On the other hand, the UK’s low productivity rate was a problem before 2008.
The good news: In the second quarter of this year, output per hour rose by 0.6%, returning total output per hour to the level enjoyed before 2008.
So if productivity rises at 0.6% quarter on quarter, that means, all else being equal, that the economy can grow at 0.6%.
Even so, on average, output per hour is still 18 percentage points higher across the rest of the G7. In France it is 27 percentage points higher, it is 30 percentage points higher in the US, and 35 percentage points higher in Germany.
The obvious solution is more investment, with the government leading the way.
A less obvious solution is for the UK to become more entrepreneurial. No one works harder than entrepreneurs, and when start-ups move upwards to scale-ups and beyond that, they are highly productive.