September 12, 2018
A new McKinsey study sets out to address the reasons why the United Kingdom experiences chronically low productivity and what can be done to use technology to improve its performance. In the report, Solving the UK’s productivity puzzle in the digital age, the authors argue that “Britain stands out as one of the worst productivity performers among its peers”. They argue that there are four distinct reasons for the weakness since the economic crisis: “boom and bust” in the financial sector, the strength of employment growth, weak investment and uneven “digitisation”. It claims that the UK is operating at only 17 per cent of its digitisation potential, indicating how much scope for improvement there is.
The report describes how declining labour productivity growth characterised many advanced economies after a boom in the 1960s, and how since the mid-2000s that decline has accelerated. Against that backdrop, the United Kingdom stands out as one of the worst performers among its peers. Its absolute level of productivity has persistently ranked toward the bottom of a sample of advanced economies.
Moreover, in the aftermath of the crisis, the United Kingdom, along with the United States, recorded one of the lowest growth rates and steepest declines in growth, falling by 90 percent. Between 2010 and 2015, UK productivity growth flatlined at 0.2 percent a year, far below its long-term average of 2.4 percent from 1970 to 2007.
The authors argue that boosting productivity is important for all advanced economies as they navigate potential economic headwinds, such as an ageing population and an ongoing shift to low-productivity services, but particularly for the United Kingdom, with an uncertain outlook for trade and investment after Brexit.
The report identifies the key reasons for the United Kingdom’s recent weak performance by analysing cross-country, regional, and sectoral patterns as well as other statistics.
It suggests that four factors – financial sector boom and bust, employment growth, investment decline, and uneven digitisation—explain the UK’s larger decline in labour-productivity growth. Across all the countries it analyses, there is the potential for at least 2 percent productivity growth a year over the next ten years.
However, capturing that potential in the United Kingdom will take time and require policy makers and businesses to take decisive action in key areas. These include skill building for the existing and future workforce and managers; accelerating adoption of digital technologies through better information, access to finance, collaborations, and a favourable policy environment; and promoting additional investment and exports.