Thursday, 28 March 2013

The worrying slump in manufacturing productivity

I’ve just got back from the barbers having had my pre-Easter shearing. Fortunately my Cypriot hairdresser did as good a job as on all my previous visits in the past 20 years. He was understandably concerned about his finances but seemed happy that he was doing haircuts rather than having them metaphorically done to him by assorted monetary authorities. But I made sure I went before the banks reopened, just to be on the safe side.

Suitably shorn, I turned to the latest economic headlines. A good news day it seemed. The Office for National Statistics figures for service sector output looked good, while a report from the OECD paints a somewhat brighter picture for the global economy, continued weakness in the Eurozone notwithstanding. The OECD also reckons the UK will avoid a triple-dip recession, though I’m increasingly tired of debate on this subject. Whatever modest side of zero GDP turns out to be in Q1 2013 is of far less significance than the possibility of several more years of below trend growth.  

As for the latter, with the number of people in work rising sharply against a backdrop of falling GDP it’s not surprising to see that the ONS this morning also reported a further quarterly fall in UK hourly labour productivity (down 2.3% comparing Q4 2012 with Q4 2013). However, I was taken aback by the figures for manufacturing productivity.

Output per hour in the manufacturing sector has now fallen for five successive quarters and in Q4 2012 was 5.2% lower than a year earlier. Such a sharp and prolonged fall is in marked contrast to much of the period since the start of the recession in 2008 during which time manufacturing productivity has generally increased. There have been a few isolated quarters of falling productivity but these have never been sustained in the manner of 2012.

This is worrying. The counterpart to the slump in manufacturing productivity has been a surge in unit wage costs in the sector which have registered a year on year increase of 7.4%, despite relatively subdued pay rises for manufacturing employees. This cost hike is not good for manufacturing competitiveness, especially with our potential customers in the Eurozone feeling the economic squeeze, and represents a serious further blow to hopes of an export led recovery in the UK. Falling productivity in the economy as a whole is a problem as well as a puzzle. A slump in manufacturing productivity is an even bigger concern, and deserves more attention.

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