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UK productivity slowdown unprecedented in 250 years – new study shows

Professor Nicholas Crafts

The current productivity slowdown in the UK is the worst for 250 years thanks to the perfect storm of three significant adverse conditions, new research has revealed. 

The UK’s slowdown has resulted in productivity being 19.7% below the pre-2008 trend path in 2018, according to research from the University of Sussex and Loughborough University. 

The new study reveals that the slowdown is nearly double the previous worst productivity shortfall ten years after the start of a downturn and is unprecedented in the last 250 years. 

The record-breaking slowdown is due to the continuing legacy of the 2008 financial crisis, the waning impact of information and communications technologies and impending Brexit, say authors Professor Nicholas Crafts and Professor Terence C. Mills, in an article published in the National Institute Economic Review on 6th February.  

Prof Crafts, Professor of Economic History at the University of Sussex Business School, said: “We cannot say for certain the reasons behind this unprecedented slowdown but we can offer a conjecture that a combination of adverse circumstances, itself unprecedented, may be responsible for a large part of the evaporation of productivity growth since 2008. The unfavourable conditions include the ebbing away of the ICT boom, the implications of the financial crisis and impending Brexit.” 

The current slowdown far outweighs significant productivity slowdowns in the past which include: 
 
The end of the mid-Victorian boom in the early 1870s - 10 per cent ten years after 1883.  

The Edwardian ‘climacteric’ at the turn of the 20th century – The shortfall at the 10-year mark was 5.5 per cent with the ending of the steam age and before electricity had made a significant impact on productivity. Growth accounting suggests the impact of steam power on productivity growth extended over a long period of time but never reached the intensity of the peak associated with ICT.  

The Great Depression of the early 1930s - The shortfall at the 10-year mark was 5.3 per cent. The Great Depression was quite different from post-2008 with no UK banking crisis and the impacts of technology (electricity and the internal combustion engine) were gathering pace rather than weakening. 

The end of the European ‘Golden Age’ of rapid catch-up growth in the early 1970s – The previous largest negative deviation from previous trend was 10.9 per cent ten years after 1971.  
 
Labour productivity was lower in the late 18th century when it averaged -0.13 per cent per year between 1760 and 1800 than it has been post-2008 but this did not entail a downward turn from a previous strong trend growth performance. 

Prof Crafts said: “This long-run historical perspective highlights that recent UK productivity performance has been shockingly bad." 
 
Looking at the potential causes for the slowdown, the academics point to: 
 
The waning impact of ICT - ICT had a substantial impact on UK productivity growth around the turn of the 21st century. The contribution of ICT capital to labour productivity growth averaged 0.82 percentage points per year during 1996 to 2007 compared with only 0.19 percentage points during 2008 to 2018. A new technology revolution may be on the horizon with artificial intelligence but this has yet to have a significant impact on productivity. 

The global banking crisis of 2008 - Banking crises can be expected to have an adverse impact on productive capacity such that the level of potential output is permanently reduced compared with a business-as-usual counterfactual. The impact of the UK financial crisis on potential output has variously been estimated to be between 3.8 and 7.5 per cent. 

Brexit - The short run impact of Brexit since mid-2016 includes its effect on investment through uncertainty, the diversion of top-management time towards Brexit planning and a relative shrinking of highly-productive exporters compared with less productive domestically orientated firms. Using evidence from a large survey of UK firms, one study estimated productivity has reduced by between 2 and 5 percent while an alternative calculation using a synthetic control group methodology to create a ‘doppelganger’ economy not subject to the Brexit shock estimates GDP at 2 per cent lower in 2018. 
 
The paper is published in the February 2020 edition of the National Institute Economic Review, the quarterly publication of the National Institute of Economic and Social Research. 

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By: MARGARET Ousby
Last updated: Wednesday, 12 February 2020

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